If damages reach the policy limit in a claim, are defense costs paid by the insurer in addition to the limit?

• A. Yes, defense costs are paid in addition to the policy limit
• B. No, defense costs are included in the limit
• C. They are paid only if court approves
• D. Only for certain claims

Answer: (A)

Defense costs are treated separately from the damages limit. In many liability policies, the insurer covers the legal defense costs in addition to paying damages up to the policy limit. So even when the damages paid hit the limit, the defense expenses can still be covered separately. For example, if the policy limit for damages is 1,000,000 and defense costs run 100,000, the insurer would cover the 1,000,000 for damages plus the 100,000 for defense, total 1,100,000. This arrangement helps ensure the insured can defend the claim without those defense expenses eroding the limit available for settlement or judgments. (Policy forms vary, but this item reflects the outside-the-limit treatment of defense costs.)