Liability insurance is a part of the general insurance system of risk transference. Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss. The modern system relies on dedicated carriers to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract.
In general, damage caused intentionally and contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the right to defend the insured. The legal costs of a defence are not affected by any policy limits, which is useful because they can be significant where long trials are held to determine either fault or the amount of damages.