In legal terms, the word liability refers to fault. The person who is at fault is liable to another because of his or her actions or failure to act. One example is in the case of a crime. The liability of the offending party may include providing restitution for damage to property or paying medical bills in the case of physical injury.
Another example of liability in the legal realm is an automobile accident. The person who caused the accident, through action or omission, is liable to the injured party. Liability insurance exists for just such a purpose. It covers the expenses of the injured party, including damage to the vehicle or other property as well as a certain amount of medical expenses, and may reimburse the injured party for attorney's fees if civil action is required.
In accounting terms, liability describes an obligation. It refers to money owed to complete a transaction, debt that has yet to be paid, or products or services that have been paid for but have not yet been rendered. There are two general classifications to sum up these types of liability: long term and short term. Long-term describes debt paid out over more than one year, while short-term liability refers to debt paid within a year or less.
Some other examples of liability include money that is yet to be paid out, such as benefits from a life insurance policy or a settlement, either one of which represents a liability for the insurance provider. An employee's pension, as well as any other savings or retirement fund, is also considered a liability for a company. For the consumer, liabilities may include a home mortgage, second mortgage, line of credit, lien of any kind or car payment. Of course, for the entity to which these monies are owed, each item generally represents an asset.
Overall, liability simply describes some form of obligation or responsibility. It represents an outstanding debt, products or services that have yet to be provided, or acknowledgment of responsibility and payment provided for damage caused through actions or negligence.