Alabama Property and Casualty Practice Exam

What is true concerning defense costs in a liability contract?

1. They only pay if you are legally liable

2. They pay in addition to the limits of the policy

3. They must be purchased separately

4. They can cover the insured's cost of suing a negligent party

The correct answer is: They pay in addition to the limits of the policy

In liability insurance contracts, it is accurate that defense costs are typically paid in addition to the limits of the policy. This means that when an insured is faced with a liability claim, the insurer covers not only the damages awarded to the claimant but also the associated legal fees incurred in defending the lawsuit. This feature enhances the protection for the insured, as it allows for the policy limits to remain intact for settlement or judgment amounts, separate from the costs of defense. This structure is beneficial because it ensures that the insured can effectively defend against claims without the fear of rapidly depleting their coverage limits. The additional coverage for defense costs can vary depending on the specifics of the policy, but in most standard liability policies, this is a typical provision aimed at providing comprehensive support for the insured during legal proceedings. Understanding this aspect of liability insurance is crucial for policyholders, as it emphasizes the importance of having adequate liability coverage both for potential settlements and the costs associated with defending against legal actions.