Liability insurance is a part of the general insurance system of risk financing to protect the purchaser (the "Insured") from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event the entity is sued for claims that come within the coverage of the insurance policy.
Liability insurance is designed to offer specific protection against third party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering a loss who is not a party to the insurance contract. In general, damage caused intentionally is not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defence normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defence costs tend to soar when cases go to trial. In many cases, the defense portion of the policy is actually more valuable than the insurance. In complicated cases, the cost of defending the case might be more than the amount being claimed, especially in so-called "nuisance" cases where there is no liability but the case has to be defended anyway.