Defense Costs Inside the Limit of Liability

August 18, 2016

 

Did you know that a liability policy, which is part of any typical business insurance policy or commercial insurance policy coverage, has two distinct obligations? A liability insurance policy, if it is a general liability, product liability or professional liability insurance policy is designed to protect you against your legal obligation to pay others because you have hurt them and/or have damaged their property.

 

The policy also defends you against claims or lawsuits. So in addition to paying claims, the policies will also pay for the associated defense costs and court fees until it is proven you are not negligent or the applicable policy is not responsible.

 

What Is Covered Under an Insurance Policy Defense Costs?

Defense costs generally include:

  • Attorney fees (including cost of legal staff and expenses)

  • Court costs of the applicable jurisdiction

  • Costs of filing necessary legal papers

  • If applicable, costs of expert witnesses

  • Costs associated with investigation, etc.

How Are Defense Costs Handled?

Defense Coverage can be offered in two ways. It can be provided as part of the insurance policy’s liability limit or as a separate coverage.  You must read your policy carefully because the method has a huge impact on the amount of your insurance protection. Let’s say that Policy A and Policy B both provide liability insurance limits of $1,000,000;

 

Policy A provides defense coverage within the insurance limits

 

Policy B provides defense coverage outside of the insurance limits

 

Now let’s see what can happen:

Example: ABC Restoration Company is sued by a customer. ABC had recently remodeled a ceiling.  Some of the drywall wasn’t secured properly and fell on the customer causing injuries to his head and neck. The damages (medical and rehab costs) totaled $850,000 and the defense costs were $400,000. Here’s how each policy would handle the costs:

 

Expense                    Policy A                 Policy B

Defense Cost            $400,000               $400,000

Damages                  $850,000               $850,000

Total Damages         $1,250,000             $1,250,000

Total Paid                  $1,000,000            $1,250,000

Client Obligation       $250,000               $0

 

If ABC Restoration Company’s protection worked like Policy A, ABC would be responsible for paying the remainder of the damages because the defense costs worked towards exhausting their $1,000,000 insurance limit. Policy B’s method of providing coverage, coverage outside of the insurance limit,  offers the most protection. If you’re not sure how your policy handles the cost of your legal defense, you can give our office a call to find out more.

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