This dissertation consists of essays exploring the microeconomic implications of liability insurance in three distinct domains: signaling, bargaining, and externalities. Each essay is dedicated to a separate topic. The first essay, Reliability Insurance, concentrates on signaling. Aside from deterring carelessness and guaranteeing compensation to victims, tort liability communicates willingness to bear any loss that results from imprudence. In so doing, tort liability counterintuitively serves the interest of injurers, allowing them to signal quality and substantiate credible commitment to careful behavior. In many market interactions, liability thus serves as a quintessential warranty, establishing injurers’ reliability. Yet the purchasing of liability insurance, at least on the surface, directly contradicts the credibility signal communicated by tort liability: instead of committing to self-incur the cost of any loss generated by their risky activity, tortfeasors choose to transfer this cost to an insurer. Insurance, in simple terms, seems to erode the skin-in-the-game message that injurers often wish to convey. The essay delves into this conundrum, studying the insurance-credibility interface both descriptively and normatively. The second essay, Insurance Settlements and the Perpetuation of Legal Risks, spotlights the unique bargaining strategies deployed by liability insurance carriers and identifies their profound legal implications. Against the anti-settlement tendencies routinely attributed to insurers, the essay identifies that under certain circumstances, it might be in insurers’ best interest to settle and avoid socially desirable litigation. This emanates from the fact that insurers are better off with legal uncertainty: ambiguity preserves injurers’ liability risks, thus enhancing their demand for insurance. The essay explores insurers’ strategic use of settlement to maintain legal risks, discusses concrete realms in which this behavior is observable, offers a normative discussion on the social costs and benefits of insurance, and considers potential mechanisms that may eliminate the ascribed problem. The third essay, Risk Allocation in a General-Equilibrium Model of Liability Insurance, offers a general-equilibrium analysis of externalities and risk allocation within the triangle of the insured, the insurer, and a third party. To date, both legal and economic literature on insurance has confined its focus to risk externalities that arise from the bilateral relationship between the insured and the insurer. Canonic accounts have introduced the problem of moral hazard, whereby the insured externalizes risk on the insurer. More modern contributions have highlighted insurer monitoring, which may induce the insured to reinternalize those risks. It was not until the last few years that commentators incorporated third parties into the equation, maintaining that they, too, tend to externalize risks on insurers. My proposed analysis completes the picture, demonstrating that the presence of third parties may actually generate multiple equilibria. The essay makes two main contributions to existing understanding of insurance dynamics. First, it shows that any actor within the triangle of insurer, insured, and a third party may act opportunistically and exhibit moral hazard that facilitates excessive risk. Second, any actor within this triangle may be the one who ultimately bears the cost of such excessive risk.