Thursday, June 4, 2009

Look past the limit of liability and see the all the coverage!

Too often when it comes to liability insurance, clients see the limit of insurance as all that they are buying. When they are in the purchasing phase of the insurance buying cycle often they base their decision on limit vs. cost. While at this critical juncture, I encourage my clients to look past the limit to what else they are getting with their coverage. This helps them to not only better understand the cost, but more importantly the real value of the coverage.

Let us examine this further with some background information. In order for any liability policy to pay for a claim it has to be proven the covered entity was negligent and thus responsible for the financial loss being claimed by the third party and for which the coverage is applicable. As part of the coverage provided by the insurance company, they retain the Right to defend against the claims in order to protect their financial interest. Very often policy language stipulates in addition to this right they have a “duty to defend” these claims, whereby the company is required to provide a defense even if ultimately the claim is found not to be covered by the insurance. In my opinion, the real value of a liability insurance policy lies in this Defense and it is applicable no matter what type (Personal, Business, Automobile, Professional, etc.) of liability coverage you purchase.

As an additional benefit, most standard liability policies provide for the Defense Costs (the costs and fees associated for fulfilling the defense) to be outside the limit of liability limit. That is, the money they spend to defend is in addition to the limit of liability available to pay for losses. Thus there is the potential for the company to pay for thousands of dollars in legal costs associated with a claim in addition to amounts they may pay if found liable. This feature however is a little bit of a double edged sword, because as you may have surmised, the insurance company will want to keep these costs to a minimum and will be inclined to settle claims before they get out of hand in there eyes (Note: This goes to the heart of reasoning to purchase higher limits of coverage, but that is the subject of another posting).

There are, of course, several other supplemental coverage items included with most liability insurance coverage. However, none are as important in this author’s opinion as the defense.

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