What does 'legal liability' refer to in the context of insurance?

In the context of insurance, 'legal liability' refers to the obligation to compensate for damages or injuries that one is deemed responsible for under the law. This means that if an individual or organization causes harm to another party—whether through negligence, breach of contract, or intentional actions—they may be legally required to provide restitution.

This concept is foundational in various types of insurance, such as liability insurance, which protects policyholders from the financial burden of legal claims against them. By paying a premium, policyholders transfer the risk of certain liabilities to the insurer, which can cover legal costs, settlements, or judgments resulting from claims made against the policyholder.

Understanding legal liability is crucial for grasping how insurance works, as it underpins the reasons individuals and businesses seek protection through insurance policies. It ensures that the injured party can receive compensation while also providing financial security for the liable party.