Legal expenses incurred by an insurance company when defending you against a lawsuit are deducted from the limits of your liability coverage. True False
The correct answer and explanation is:
Correct Answer: True
Explanation:
Legal expenses incurred by an insurance company when defending an insured person against a lawsuit are generally deducted from the limits of liability coverage in many types of insurance policies. This means that if an insurer provides defense for the insured, the legal costs such as attorney fees, court costs, and other defense-related expenses can reduce the amount of coverage available for settlements or judgments.
For example, in an auto or homeowner’s liability policy, if the insured is involved in a lawsuit, the insurance company typically covers the defense costs. However, these costs are subtracted from the total policy limit for liability claims. If the insured has a policy with a $500,000 liability limit, and the insurer spends $50,000 in legal fees defending the insured, only $450,000 remains available for any potential settlement or judgment.
This structure ensures that the insurance company can manage the cost of defense without impacting the primary coverage amount in cases where the defense costs are significant. However, this deduction mechanism may vary depending on the specific policy and the type of coverage. Some policies offer “defense costs outside the limit,” meaning the insurer pays for legal defense separately, and these costs do not reduce the policy’s liability limit. This distinction should be reviewed when purchasing insurance to fully understand the terms of coverage.
Ultimately, policyholders need to be aware that while their insurer may cover legal defense costs, these costs can directly affect the amount of coverage left to handle any potential damages or settlements, which could limit their financial protection in the event of a large claim. Always check the terms and conditions of an insurance policy to understand how legal defense costs are handled.