Texas All Lines Adjuster Practice Test

What does liability insurance cover?

1. Indemnifies a third party for damages caused by the insured's negligence

2. Covers direct damages to the insured's property

3. Reimburses the insured for lost wages

4. Provides legal fees for defendants

The correct answer is: Indemnifies a third party for damages caused by the insured's negligence

Liability insurance primarily serves the purpose of protecting the insured from claims that arise due to injuries or damages incurred by a third party as a result of the insured's negligence. When an individual or business is found liable for causing harm to another person or their property, liability insurance indemnifies or compensates the injured party, covering the damages they have sustained. This ensures that the insured can manage the financial repercussions of such incidents without facing potentially devastating out-of-pocket expenses. Understanding this function of liability insurance helps clarify why the other options do not accurately describe what liability coverage entails. For example, covering direct damages to the insured's property pertains more to property insurance rather than liability insurance. Additionally, reimbursement for lost wages is typically a feature associated with disability or income protection insurance, not liability insurance. Lastly, while legal fees incurred in a liability case might be covered under certain liability policies (especially in coverage for defense costs), the core purpose of liability insurance is to address damages caused to third parties, which is why option A is the most accurate representation of liability insurance coverage.