Insurance Defense Costs

Insurance defense costs impact claim payouts.

Insurance Defense Costs

It’s important to understand how the defense costs work on your insurance policy because it can dramatically impact how claims are paid.

Did you know that a liability policy, part of any typical business insurance policy or commercial insurance coverage, has two distinct obligations? If it is general liability, product liability, or professional liability insurance policy, a 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. In addition to paying claims, the policies will also pay for the associated defense costs and court fees until 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 the cost of legal staff and expenses)
  • Court costs of the applicable jurisdiction
  • Costs of filing necessary legal papers
  • If applicable, the 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 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: a client sues ABC law firm. The client slipped on a wet floor inside the office, sustaining back and wrist injuries.  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 Law Firms’ 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 outside of the insurance limit offers the most protection. If you’re not sure how your policy handles your legal defense’s cost, you can give our office a call to find out more.

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