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:
Expense Policy A Policy B
Defense Cost $18,000 $18,000
Damages $95,000 $95,000
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.
