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Does Your Business Insurance Policy Cover Defense Costs Within the Insurance Limit or Defense Costs Outside of the Insurance Limit?

Insurance Policy Defense CostsInsurance Defense Costs – What Is Covered? 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. A policy also defends you against claims or lawsuits. In other words, besides paying for claims or suits, a liability policy also pays for their related legal costs and court fees.

Insurance Defense Costs – What Is Covered Under an Insurance Policy’s Defense Costs?

Insurance 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.

Insurance Defense Costs – What Is Covered an 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

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 Widget Company is sued by a customer. The customer purchased a sporting good skating product that ABC Widget Company sell online over the internet. When the customer was skating down the street the skate failed and broke. The customer, who happened to be an attorney with unlimited access to legal support, suffered cuts and compound fractures to his wrist & arm. 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:

ExpensePolicy APolicy B
Defense Cost$400,000$400,000
Total Damages$1,250,000$1,250,000
Total Paid$1,000,000$1,250,000
Client Obligation $250,000 $0

If ABC Widget 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, talk to an insurance professional and make sure you have or obtain get the coverage you need it is available.