What is liability insurance? Liability insurance is very likely the most important type of insurance to have and to have in the right amount. Liability insurance covers another driver’s bodily injury, lost wages, pain, and suffering for which you are responsible or legally liable. It also covers property damage, be it to the vehicle or other personal property. Your liability coverage will pay for any judgments against you but only up to the limits, which you elected on your policy. If the limit is less than the claim against you, you may be held personally responsible for any difference. That is why having an adequate policy is paramount to your financial security.