Public Liability Insurance

What it is

Public liability insurance covers the insured's legal liability for accidental bodily injury to third parties, or damage to their property, arising in connection with the insured's business. It pays damages and settlements, and the costs of defending the claim, as the policy provides.

The word that matters is third parties. Injuries to the insured's own employees are not public liability claims. They fall under employees' compensation cover, which is still often sold as Workmen's Compensation insurance.

The compulsory cover under the 1991 Act

The Public Liability Insurance Act, 1991 was enacted after the 1984 Bhopal gas tragedy, which showed the need for mandatory liability insurance in hazardous industries. It requires every owner handling notified hazardous substances to insure the liability the Act imposes: immediate relief for death, injury or property damage suffered in an accident by people other than workmen.

That liability is on a no-fault basis. The victim does not need to prove negligence; the occurrence of the accident is enough. The relief is fixed by the Act. A business that handles no hazardous substances, such as a software company, is outside the mandatory requirement, though it may still buy public liability cover voluntarily.

Ordinary public liability cover is a different thing. It is voluntary and responds to the insured's legal liability generally, not to the fixed statutory relief.

Absolute liability

In M.C. Mehta v. Union of India (1987), the oleum gas leak case, the Supreme Court laid down the principle of absolute liability. An enterprise carrying on a hazardous or inherently dangerous activity is liable for the harm it causes, with none of the exceptions, such as act of God or the act of a third party, that apply to strict liability.

How the policy responds

A public liability policy on a claims-made basis covers claims first made against the insured, and notified to the insurer, during the policy period. The incident may have happened earlier, but not before any retroactive date stated in the policy.

Legal defence costs are covered, but the wording decides how. They may be included within the limit of indemnity, in which case they reduce the amount left for damages, or paid in addition to it, in which case the limit is untouched.

Fines and penalties imposed on the insured are punitive, and public liability policies generally exclude them. The cover is for compensation payable to the injured third party. Wordings of other liability covers differ, so each policy has to be read.

Rules at a glance

Key points

• Public liability insurance covers legal liability for accidental bodily injury or property damage to third parties arising from the business.
• Injury to the insured's own employees belongs under employees' compensation cover, not public liability.
• The Public Liability Insurance Act, 1991 makes insurance compulsory for owners handling notified hazardous substances, on a no-fault basis.
• Absolute liability, from M.C. Mehta v. Union of India (1987), allows none of the exceptions available under strict liability.
• A claims-made policy responds to claims first made and notified in the policy period, subject to any retroactive date.
• Defence costs may sit within the limit of indemnity or in addition to it, depending on the wording.

Common misunderstandings

• Public liability does not cover the insured's own workers: their injuries fall under employees' compensation cover.
• The 1991 Act does not make public liability insurance compulsory for every business: only owners handling notified hazardous substances must insure.
• No-fault relief under the Act is not the same as voluntary public liability cover, which responds to legal liability generally.
• Fines and penalties are not compensation, and public liability policies generally exclude them.

Questions people ask