Final answer:
The statement is true; in insurance, liability means the obligation to pay for damages caused. Insurance uses deductibles, copayments, and coinsurance to mitigate moral hazard and share costs.
Step-by-step explanation:
In the context of insurance, the term liability indeed means that you may be required to pay someone for damages that you caused. This is true, and it forms the basis of liability insurance coverage, where the insurer agrees to cover the policyholder against claims resulting from liabilities due to accidents or negligence.
Insurance is fundamentally a means of risk-sharing, where various mechanisms are used to reduce moral hazard. Moral hazard occurs because individuals with insurance may take greater risks or exhibit carelessness since they are protected against the consequences. To mitigate this, cost-sharing strategies like deductibles, copayments, and coinsurance are implemented. These require that the insured party pays a portion of the expenses before the insurance company pays the rest.
For instance, auto insurance may not cover the first $500 of damages, which is known as a deductible. In health insurance, a copayment might be a fixed amount, such as $20 per doctor’s visit, with the insurance covering subsequent costs. Coinsurance is a cost-sharing strategy where an insurer covers a set percentage of the costs, like in the case where the insurance covers 80% of home repair costs after fire damage, and the homeowner pays the remaining 20%.
Workers' compensation insurance is another form of insurance where employers contribute to a fund that offers benefits to employees who are injured while on the job.