With a liability limit of $100,000 and a claim requiring $105,000 including $5,000 in prejudgment interest, who pays the $5,000 and why?

• A. Insurer pays prejudgment interest because it is within policy limits
• B. Insurer pays if damages are below limit
• C. Insurer pays only defense costs
• D. The insured pays prejudgment interest because the limit is exhausted

Answer: (D)

The key idea is that prejudgment interest is treated as part of the damages and the insurer pays damages only up to the policy limit. If the total claim, including prejudgment interest, exceeds that limit, the insurer’s obligation ends at the limit and the insured must cover the excess.

Here, the claim is 105,000 total, with 5,000 of that being prejudgment interest. The base damages amount to 100,000, which exactly uses up the policy limit. Since the limit is exhausted, there’s no coverage left to pay the 5,000 prejudgment interest. Therefore, the insured bears that portion.