August 23 2017

Your liability insurance policies: Coverage for Defense Costs v. Indemnity Costs

Keep in mind that company’s liability insurance policy(ies) provide two important benefits:

In the event your company is named in a claim, lawsuit, and/or administrative proceeding:

  1. Your liability coverage may pay for the attorneys you will need to retain to defend you; and
  2. The scope of coverage available for these defense costs may be broader than the scope of coverage available to pay for the costs to settle the matter or pay any judgment entered against your company (i.e., indemnity costs).


Always read your policy(ies) carefully and not assume anything. Where, at first blush, it might appear that the claim is not covered, on further review (and consideration of applicable caselaw) you might have an argument that your insurer must pay for your company’s defense costs pending a more definitive coverage analysis and/or while the matter gets resolved.


Whether the covered defense costs will be paid for out of or in addition to your policy limits is another matter that varies by policy. At the outset, remember that coverage for defense costs is a valuable component of a liability insurance policy.

To effectively trigger your company’s “defense” coverage when needed, keep in mind that:

  1. It is your duty to notify the insurer of a claim as soon as possible;
  2. The initial letter or complaint your company receives containing the allegations against it will often determine the existence and scope of the defense coverage, so it is critical to provide a copy to your insurers promptly; and
  3. Involving your insurer(s) up front when retaining legal counsel may be advisable.


One final but crucial point: If your insurance company defends under a “reservation of rights,” it may also be reserving the right to recoup from you the defense costs it pays if it turns out there is no coverage for the claims made against you. Thus, before accepting the insurer’s defense, you should confer with insurance coverage counsel (independent of the defense counsel your insurer assigns to defend you) to determine whether it is prudent to accept the insurer’s defense.


In some cases, after the lawsuit is concluded or even while it is pending, insurance companies sue their own insured to recoup tens of thousands, if not hundreds of thousands or even millions of dollars (in really big cases), of defense costs they paid to defend their insureds.

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