Liability insurance coverage refers to a third-party liability policy. A third-party liability policy “provides coverage for liability of the insured to a ‘third party.’” Liability insurance is based on the ideas of fault, proximate cause, and duty. In property insurance, for example, coverage for various events is based on what is included or excluded in the contract. However, in liability insurance, the insured is covered for his or her own negligence (Montrose Chemical Corp. v. Admiral Ins. Co.). In other words, liability insurance compensates a third party for damage caused by the negligence of the insured. For example, one may have liability insurance for one’s car, meaning that if he/she gets into an automobile accident and injures someone, the liability insurance will compensate the injured person.
In finance terms, a liability is a debt. It's an amount you are legally or contractually obligated to pay to another person, business or entity. A tax liability is an amount you have to pay to federal, state and local governments.
Payment of a liability generally involves payment of the total sum of the amount borrowed. In addition, the business entity that provides the money to the borrowing institution typically charges interest, figured as a percentage of the amount that has been lent.
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