What Is a Liability?

Liability is one of the most important concepts in both finance and law, so you should be aware of its implications. Liability means someone takes legal or financial responsibility for something. If you are held liable for a debt or a claim you are responsible for it.

Any person or business can be held liable for a wide variety of debts and legal obligations. So it is always a good idea to understand what your liabilities are and how they could impact you. That way, you can take measures to protect yourself, your money, and your property.

Liability in Lawsuits and Claims

In the world of lawsuits and claims, liability means that you can be held legally held responsible for a loss incurred by somebody else. If Joe came onto your property and fell down a hole, you failed to cover up; you would be liable for any damages Joe suffered. Joe could sue you for the cost of any medical bills he had to pay because he was injured. Joe could also sue you if he lost income because he was injured and unable to work.

There are many ways that you can incur liability. If you sell any good or service, you could be incurring obligations. Let’s say Shane hired Sally to balance his books for him, but she didn’t do an excellent job. Some of Shane’s bills were not paid, and he suffered financial losses. Shane could sue Sally because she made herself liable for some of his debts by promising to provide a service for him.

This is why there is something called liability insurance, a policy that protects against liabilities incurred from specific activities. A homeowner’s policy will protect you from responsibilities specific to owning a home, for example, Joe’s lawsuit. A business policy will cover losses related to business. Sally might have a plan that would pay for a lawyer to defend her from Shane’s lawsuit.

Liability in Business and Everyday Life

The concept of liability is fundamental to our legal system. Our system of laws assumed that individuals would undertake responsibility or liability for their actions. For example, it concluded that if you would drive your car safely if you drive recklessly and cause an accident another driver and his insurance company could sue you.

Therefore much of the idea behind it is to encourage individual responsibility. There are also mechanisms in our legal system designed to protect people from some liabilities. A corporation, including a limited liability corporation, is intended to take shield investors and executives from liabilities. By setting one up, a businessperson can protect his home or personal bank accounts from lawsuits arising from his business activities.

Some laws specifically protect specific individuals and organizations from kinds of liabilities. Many government officials such as police officers and firefighters are not liable for claims arising from their actions. The reason for this is that there is a high risk that these individuals may cause losses to private individuals, but their activities are beneficial to society as a whole.

That is why you could not sue the fire department for breaking down the door to a house to put out a fire. Such a lawsuit would hamper firefighters and keep them from doing their job. Other individuals that benefit from limited liability include officers of the court like judges, doctors, school teachers, and some religious organizations.

Everybody should understand the concept of liability because it governs our lives and dictates a lot of our actions. A thorough understanding of it can make your life a lot easier.