Defense costs include the costs of legal fees, court filing fees, investigations, legal paperwork, and any other expenses associated with defending against a lawsuit. Some insurance companies cover these expenses under certain liability policies, but the amount of coverage of defense costs depends on the insurance policy type. Liability insurance may protect you financially from legal expenses only, while others may also provide coverage for damages awarded to a plaintiff.
Defense costs can be defined as any reasonable or necessary fees and expenses incurred as a result of a lawsuit or appeal of a claim. These costs are typically made up of the following:
Liability insurance uses two main approaches to determine defense cost coverage: outside the limits and inside the limits.
Outside the limit means that any costs that the insurance company incurs in defending a claim against the insured do not reduce the liability limit. In other words, there are separate limits available for legal defense costs and court-awarded damages that may need to be paid to an opposing party. Therefore, defense costs outside the limits such as damages or settlements will not affect your liability insurance limits. For example, if you have a $500,000 general liability limit and your insurance company ends up paying $50,000 to file a claim, you will still have your $500,000 liability limit remaining to pay for any other defense costs.
On the other hand, defense costs inside the limit of liability means that any money spent on defense costs will reduce the limit of liability. Considering the same example from above, assume you have a general liability limit of $500,000, but your insurance company has to pay $50,000 for defense costs. In insurance with defense costs inside the limit, you will have $450,000 left to pay for other legal expenses.
The details of your liability insurance policy must always be carefully reviewed, since doing so can mean the difference between full coverage and spending thousands of dollars out of pocket.
Although outside the limits insurance tends to be pricier than inside the limits, it is usually ideal since it allows the insurance company to protect you from further expenses such as the judgment or settlement. In situations where insurance with defense costs outside the limit is not available, you may want to consider raising your liability limit.
Speak to a professional before making any serious decisions regarding liability insurance. Expert insurance lawyers can advise you about the right type of liability insurance for your needs and circumstances.