Liability is an obligation to pay money to parties other than yourself or occupants of your vehicle. The liability component of the insurance covers damages which you might cause to other vehicles or property in an accident. It also covers costs for bodily injuries which you might cause to other parties.
For example, if you caused an accident and were found legally responsible, you would be required to reimburse the driver and passenger in the car you hit for medical expenses they incurred, expenses as determined by the Mexican court, and the value of their vehicle. The liability component of your Mexican insurance policy would pay for any of these expenses up to the limit on the policy.