Define: Liability Risk

Liability risk is the risk assessed from the purchase, use of goods or ownership by a company. It also can be a threat to the company if there is a breach of standards due to operations or a neglect action. Companies attempt to limit their liability risk but assume that some risk is inherent with the production of some products such as pharmaceuticals and automobiles.

There are three basic types of liability risks: product liability, general liability and contractual liability. General liability refers to the “company’s operations causing damage to the company’s employees, contractual parties or third parties.” Product liability is the risk the company has when they produce a product that the product will injure a person or damage property. Contract liability refers to the risk contracts will not be completed properly or within the set timeframe, causing loss or claims of breach of contract.

Companies create risk management groups to study an organization’s potential liabilities and prioritize them. With this risk management process, the company can decide which risks are more likely to occur and which could potentially result in the greatest loss. Companies can then allocate their resources to the areas of greatest concern and those which could cost the most money or have the greatest negative impact.

A liability risk is a vulnerability that can lead to a party being held liable for specific types of losses. In other words, it is the risk that an individual or corporation would engage in behaviour that causes bodily harm, death, property damage, or financial loss to third parties. When this occurs, the harmed third party has the option of suing the allegedly responsible party and pursuing legal remedies.

When an insured individual or business receives such a notice of civil action, they must promptly disclose it to their insurance provider, who will then investigate the claim, defend the lawsuit, and pay any damages or settlements awarded to the plaintiff if found legally liable in court.

Many firms and individuals confront numerous sorts of liability risk on a daily basis, with the potential for significant damages. As a result, liability coverage is critical for both businesses and people.

A firm or individual may be subject to a variety of liability concerns. A corporation may face general liability risks, product liability risks, buildings and operations risks, professional liability risks, or contractual liability risks, for example.

Among the risks mentioned above are the following:

• A customer slips and falls on your store’s wet floor.
• While delivering to a customer’s house, your delivery personnel inadvertently knock over a valuable vase.
• A customer orders takeout from your restaurant and becomes ill after consuming it at home.
• Your engineering team made a mistake on certain designs, resulting in a physically unsound building.
• While out on a delivery, your pizza delivery person inadvertently hits someone.

A good commercial general policy will cover a wide range of liability risks. It is extremely critical for manufacturers to have adequate product liability coverage in the event that one of their products fails. Product liability coverage is frequently, although not always, included in commercial general policies.

Professionals, such as lawyers, engineers, and insurance agents, must carry proper professional liability coverage because it is typically excluded from most commercial general liability plans.

On a daily basis, individuals face a wide range of liability risks. Every time a driver gets in their car, they run the chance of hitting someone or something. Homeowners may incur bodily harm if they fail to clean their walkways of snow and ice after a snowstorm as required by municipal bylaws.

Home, tenant, or condo insurance coverage will cover the majority of individual liability concerns. Automotive insurance policies that are required by law also assist individuals in addressing their automobile liability concerns.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 10th April, 2024.