Which statement accurately describes the function of liability insurance?

Liability insurance is designed primarily to cover legal costs and claims made against an insured individual or entity. This type of insurance is crucial because it protects against the financial impact of lawsuits, which can arise from a variety of situations, such as accidents, negligence, or other acts that result in injury or damage to third parties. By having liability insurance, the insured can address legal fees, settlements, or judgments that may follow these claims, thereby providing significant financial security.

In contrast, other options relate to different types of insurance. Some cover specific risks associated with property damage, losses due to fire, or fluctuations in financial markets, none of which align with the primary function of liability insurance. This distinction is essential for understanding the specific purpose and utility of various insurance products.