How Does Your Insurer Defend You?

Two Distinct Obligations

Consumers who have any significant experience with buying insurance protection for their auto, home and other property are likely to understand how coverage is provided for their liability and/or their property. Conversely, few may be aware of the role that an indirect coverage plays in the obligation owed by an insurer to its customers.

A liability insurance policy, either vehicle or personal liability, is designed to protect you against your legal obligation to pay others because you have caused them personal injury, damaged their property, or have done both. Further, such insurance policies also promise to defend you against claims or lawsuits that are filed against a policyholder. In other words, besides paying for claims or suits, a liability policy also pays for the legal costs and fees associated with liability losses.

What Is Covered Under Defense Costs?

The 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.

Is Defense Provided Within The Insurance Limits?

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's insuring agreement(s) 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 $100,000; Policy A provides defense coverage as part of the insurance limits while Policy B gives separate protection. Now let's see what can happen:

Example: Jay Lowcare is sued by his son's teacher, who came to his home to deliver some homework for Valiant Lowcare (who's suffering from strep throat). When the teacher started down the wooden stairs of the Lowcare's front porch, the second stair broke. The teacher suffered cuts and compound fractures to his left leg. Jay Lowcare knew that the stairs had been weakened by termites, but hadn't bothered to replace the stairs or warn anyone. The damages (medical and rehab costs) totaled $95,000 and the defense costs were $18,000. Here's how each policy would handle the costs:

ExpensePolicy APolicy B
Defense Cost$18,000$18,000
Total Paid$100,000$113,000

 If Jay Lowcare's protection worked like Policy A, Jay would be personally responsible for paying the remainder of the damages because the defense costs ate into his insurance limits. Policy B's method of providing coverage offers the most protection.

If you're not sure how your policy handles the cost of your legal defense, talk to an insurance professional and make sure you get the coverage you need.