What does "legal liability" refer to in insurance?

Legal liability in the context of insurance refers specifically to the obligation to compensate for damages as mandated by law. This concept is fundamental in determining an insurer's responsibility to indemnify a policyholder against claims made by third parties for losses, injuries, or damages caused by the policyholder’s actions or negligence.

In the realm of commercial casualty insurance, understanding legal liability is crucial because it underpins many types of coverage, including general liability, professional liability, and product liability insurance. When a business is legally liable, it is required to pay compensatory damages to the injured parties or cover the costs of legal defense. This refers to a legal obligation to the extent that if a legal claim is brought against the business, the insurance policy would provide financial protection up to the limits set forth in the policy.

The other options address different aspects of insurance or obligations not strictly related to legal liability. The obligation to provide health coverage pertains to employee benefits, paying premiums on time relates to the financial responsibilities of the policyholder, and disclosing risks is part of the principle of utmost good faith in insurance contracts. However, none of these directly capture the essence of legal liability.