Knowing whether your liability insurance policy has defense outside the limits or defense costs within the limits is important.
The terms of a liability policy will affect how defense expenses are covered by your insurance carrier and how they affect your limits of insurance in the event of a judgment.
What Does Defense Within The Limits Mean?
The terms “defense outside the limits” and “defense within the limits” determine how your insurance company handles expenses to defend a claim against you or your company.
According to IRMI, defense costs within the limits of liability means that in the event your insurance company has to defend you or your company from a claim, all legal, investigative, defense and appeal expenses incurred will erode your limits of liability.
For example, let’s say you’re hit with a lawsuit and the insurance company incurs $600,000 in defense expenses (lawyers fees, discovery, etc.)
If you have a $1 million per-occurrence limit on your liability policy, this means, after defense costs, your business is left with only $400,000 to pay any judgment or settlement.
In the event of a judgment of, say, $1,000,000, your out of pocket costs will be $600,000.
However, if your defense costs are outside the limits it means defense expenses will not erode – or potentially exhaust – the limits you have to pay for a judgment.
Supplementary Payments is the term for additional expenses that may be incurred in the investigation and resolution of claims.
Supplementary payments may include:
- Defense expenses
- First aid expenses
- Premiums for appeal and bail bonds
- Pre-judgment interest
- Post-judgment interest
- Reasonable travel expenses incurred by the insured at the insurer’s request when assisting in the defense of a claim.
At the end of the legal defense process, a settlement or judgment is considered damages rather than supplementary payments.
Attorneys’ fees may be considered as either damages or supplementary payments, depending on the policy. Commercial general liability (CGL) and business automobile liability policies often cover supplementary payments outside the limits of liability.
In contrast, supplementary payments reduce the limit of coverage under most (although not all) professional liability policies.
What Is Defense Outside The Limits?
Defense costs outside the limits means that there are separate limits – or even unlimited – funds available for defense in addition to the limits of liability on your insurance policy.
In the event of a claim involving a legal defense, the costs of defense will not erode the policy limits left in the event of a judgment. Defense costs may include:
- Legal fees
- Court costs
- Cost of legal filings
- Expert witness fees
- Investigative and forensic fees
These fees quickly add up and may leave you vulnerable in the event of a judgment that exceeds the remaining limits.
If you have multiple additional insureds, and everyone is named in a lawsuit, it is possible that each additional insured you add to your insurance policy – that your insurance company then has to defend – could erode your limits of liability in an insurance claim even further if your defense costs are not outside the limits.