A loss exposure is anything that may cause a loss. This is an asset or condition exposed to a situation or occurrence that results in a financial loss to the primary party. There are three elements to loss exposures:
- Asset at risk of loss
- Cause of loss (peril)
- Cost of loss
Liability loss exposures
Liability loss exposure is the possibility of financial loss caused by legal action against a person or organization. For example, a person involved in a car accident could be sued for the damage they caused to the other driver’s car. This encompasses all legal expenses, including lawyer fees, trial expenses, and damages paid in a lawsuit. Even if the party is not found liable in court, they will be responsible for paying defense costs and claim-related expenses.
Liability exposure often results in damages. Damages are the amount of money paid by the liable party to the injured party to compensate the injured party for losses.