Defense Costs in Liability Policies

 

Liability policies are designed to help the insured in defending itself against third-party insurance claims. Liability policies usually cover defense costs as part of the overall limit of indemnity. Defense costs are the costs incurred by the insured party while defending a lawsuit. The defense costs are the costs incurred for things such as hiring a legal professional, fees due to the court, collecting facts, expenses related to paperwork and other expenses for court cases.

When a claim is made under a liability policy, it is the duty and sometimes the right of the insurer to defend the insured. In such a scenario, the legal expenses incurred also impacts the policy limits, unless expressly specified otherwise.  

The rule of defense costs not affecting the policy limits is helpful because the defense costs tend to be high when there are legal proceedings in multiple judicial forums and especially in overseas jurisdictions. Sometimes the defense costs can be more than the award amount.

Liability policies such as D&O policy, Professional liability, Public liability, CGL policy and Product liability policies specify defense cost limits within the overall limits of indemnity in the policy. This will cover the compensation claims made by clients, employees, investors, customers, shareholders, or consumers.

Let us look at how defense cost limits are significant in different kinds of liability policies and the limits of liability for defense costs.

 

Defense costs in D&O policies

In D&O policy defense costs coverage means indemnity to directors and officers and covers legal costs, the expenses and damages arising out of claims made against them personally due to any wrongful acts committed by them in lieu of their position. These wrongful acts can be breach of duty, errors, wrongful trading, false statements, and breach of trust, errors or neglect.

 

Third parties that suffer financial losses on account of these mistakes can undertake legal action on directors and officers in an organization. Claims under the D&O policy can occur under the following conditions as well:

 

·       When the company files for insolvency or bankruptcy and the directors will have to pay third parties for settlement or else face litigations and its accompanying costs.

 

·       When the company decides to pay the settlement and litigation costs on behalf of its directors and officers.

 

·       The company faces claims on the basis of securities it has issued.

 

The D&O insurance policy will cover the defense costs and the claim amount to be paid to third parties. However the limit of liability for defense costs is dependent on the following factors:

 

• Limit of Indemnity: The defense costs and sum insured are normally directly proportional.
• AoA to AoY limits
• Geographical Jurisdiction : Normally exposure to US, Europe & Canada shall entail much higher defense costs.  
• Defense Sub-limits: The defense costs would be determined by the sub-limits of the policy.
• Deductibles: The deductible amount will determine the amount of defense costs the insurer is likely to pay.

 

 

 

Professional liability insurance and defense costs

Defense costs under professional liability insurance or E&O insurance will cover the expenses incurred during the investigation and the court proceedings. It will also include the fees paid for the lawyer and settlement costs.

 

Defense costs for product liability insurance

The defense costs will cover any reasonable expenses incurred by the insured for defense of a claim or costs incurred for investigation and settlement.

 

Defense costs for cyber liability insurance

The defense costs will cover any reasonable expenses incurred by the insured for defense of a claim or costs incurred on any forensic consultants, etc.

 

Defense costs are dependent on various factors such as the limit of indemnity, nature of insured’s business, geographical jurisdiction, etc., You must be clear about these factors to determine the defense costs limits for your policy.

 

It is best to approach an insurance broker to get a clear understanding of the defense costs coverage in the liability policy you intend to buy and take the right decision.

 

We at Zen Insurance Brokers assist in choosing an insurance policy with clauses suited to your requirements. Choose your insurance policy wisely. Get in touch with us for any assistance.

 

Disclaimer:

Zen Insurance Brokers is an IRDA registered broker which facilitates quick and adequate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.