It covers the following:

In most states, in the event of any loss or damage to the car, regardless of fault, your financial responsibility extends to the full value of the car at the time of rental, less its salvage value, plus expenses for towing, storage impound fees, an administrative fee and a reasonable charge for loss of use.

by saying if you purchase it

By accepting LDW you are relieved from all financial responsibility in the event of loss or damage to the rental car. Moreover, it eliminates the worry about policy limits and extended costs often associated in filing a claim with your own carrier.

Yes, you are insured for any loss or damage to the rental car. If however you cause damage to anyone or anything else, it will not be covered, only damage to the rental vehicle, and if the damage is the result of a violation of the rental agreement it will not be covered.