One of the best things about liability coverage is that it can provide you with a legal defense if someone files a claim against you. Many people don’t know about this benefit of liability coverage. Below is an overview of an insurance carrier’s duty to defend their clients.
What Does Your Insurance Company Owe You for a Legal Defense?
Your insurance company owes you two basic duties. One is the duty to indemnify you in case of a covered loss. The other is the duty to defend you from liability claims. These duties do not always go together. That is, the insurance company has the duty to defend you in a case that they don’t necessarily have to compensate you for.
Consider an example where a pedestrian fakes an auto accident and sues you for damages. Your auto insurer doesn’t have to compensate for such fraudulent claims. However, the carrier has the duty to defend you until they prove that the claim is fraudulent.
How Does the Defense Work With the Insurance Company?
The insurance company will control every aspect of your legal defense. For example:
- The insurance company determines which lawyer to use for your defense. The company may use an in-house legal defense team or hire another lawyer of their choosing.
- The company determines which legal theory, evidence, and witnesses to use for your defense.
- The company determines whether to settle your case or to proceed to trial.
The carrier’s right to control your defense means, for example, that you might not get to work with your favorite legal team. This right also means you don’t get to choose how much of your insurance coverage to use for the defense.
Who Pays for the Defense Costs?
Legal costs can be expensive, depending on the circumstances of the claim against you. Whether the insurer covers all the costs depends on two things. The first is your coverage limit, and the second is whether your defense costs fall under your overall insurance limit.
The costs associated with the right to defend an insurance client typically take two forms. First, some policies include the defense cost under the overall limit. The inclusion limits the amount available for claim settlement.
Say you have liability coverage worth a million dollars, including the defense costs. If your legal costs run up to $250,000, the carrier only has $750,000 to settle the claim if the plaintiff prevails. Anything above that comes from your pocket. Other policies exclude the defense costs from the overall limits. Understand your policy before you have to file any claim.
What Does the Duty to Defend Include?
The duty to defend doesn’t mean that your insurance company only pays your legal fees. Instead, the company will cover every cost associated with your defense, such as:
- Court filing fees
- Document production fees, such as photocopying fees
- Out-of-court expenses, such as travel expenses and phone bills
- Expert witness fees
You might only have to pay for the proceedings if your defense exceeds the applicable limits.
How Do Both Parties Benefit?
The right to defend benefits both the insurance company and you. For example, the insurance company:
- Will do its best to win the case since they stand to lose money (in terms of judgment award) if they lose the case.
- Avoids paying for fraudulent claims.
On the other hand, you:
- Get a good and experienced legal defense since insurance companies usually have pre-vetted firms.
- Don’t have to pay legal costs for claims against you.
- Don’t have to worry about taking time off your usual duties to go to court or track down witnesses.
Thus, it’s in both your interests to cooperate during the case.
Metropolitan Insurance Service Consultants, Inc., has over 50 years of experience in the insurance industry. Contact us for quotes on all forms of insurance you may need.