Washington State Insurance Practice Exam

What is the purpose of liability coverage in an insurance policy?

1. To protect the insured from property loss

2. To cover legal claims against the insured

3. To offer financial gain from policies

4. To ensure compliance with regulations

The correct answer is: To cover legal claims against the insured

Liability coverage in an insurance policy serves a crucial role in protecting the insured from legal claims for damages they may be held responsible for due to their actions or negligence. This is particularly important in scenarios where the insured might cause injury to another person or damage to another person's property. The coverage pays for legal defense costs and any settlements or judgments that may arise from such claims, thereby safeguarding the insured's financial resources. For example, if someone is sued for causing an accident that resulted in injury or property damage, liability coverage would cover the legal expenses incurred in defending against the lawsuit and any compensation owed to the injured party up to the policy limits. This coverage provides a sense of security to individuals and businesses, ensuring that they are not financially crippled by unexpected legal challenges that arise from ordinary activities. The other potential choices highlight different aspects of insurance that are not directly related to the primary purpose of liability coverage. While property loss protection refers to safeguarding one's own assets, offering financial gain does not align with the protective nature of liability insurance, and regulatory compliance is not a direct function of liability coverage but rather a general requirement in the insurance industry.