Consumers with any significant experience in buying insurance for their car or home may understand how liability coverage works. However, few may be aware of the importance of how a policy provides a legal defense against claims and lawsuits.

A liability insurance policy, either vehicle or personal liability, is designed to protect you against your legal obligation to pay others because you have caused them bodily injury, damaged their property, or have done both. A policy also defends you against claims or lawsuits. In other words, besides paying for claims or suits, a liability policy also pays for their related legal costs and court fees.

Defense costs generally include:

• attorney fees (including cost of legal staff and expenses)
• court costs of the applicable jurisdiction
• costs of filing necessary legal papers
• if applicable, costs of expert witnesses
• costs associated with investigation, etc.

Defense Coverage can be offered in two ways. It can be provided as part of the insurance policy's liability limit or as a separate coverage. You must read your policy carefully because the method has a huge impact on the amount of your insurance protection. Let's say that Policy A and Policy B both provide liability insurance limits of $100,000; Policy A provides defense coverage as part of the insurance limits while Policy B gives separate protection. Now let's see what can happen:

Example: Jay Lowcare is sued by his son's teacher, who came to his home to deliver some homework for Valiant Lowcare (who's suffering from strep throat). When the teacher started down the wooden stairs of the Lowcare's front porch, the second stair broke. The teacher suffered cuts and compound fractures to his left leg. Jay Lowcare knew that the stairs had been weakened by termites, but hadn't bothered to replace the stairs or warn anyone. The damages (medical and rehab costs) totaled $95,000 and the defense costs were $18,000. Here's how each policy would handle the costs:

If Jay Lowcare's protection worked like Policy A, Jay would be personally responsible for paying the remainder of the damages because the defense costs ate into his insurance limits. Policy B's method of providing coverage offers the most protection. If you're not sure how your policy handles the cost of your legal defense, talk to an insurance professional and make sure you get the coverage you need.

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