How do "defense costs" work in liability insurance?

In liability insurance, "defense costs" refer to the expenses incurred in defending against claims made under the policy. The correct understanding is that most liability insurance policies provide coverage for legal defense costs in addition to the policy limits. This means that the costs associated with hiring legal counsel, court fees, and other related expenses do not reduce the limits available for any potential settlements or judgments against the insured.

This approach is beneficial for policyholders because it ensures that they have comprehensive coverage to defend themselves regardless of the outcome of the claim. By having defense costs covered separately, insureds can allocate the full policy limits toward settlements or judgments if necessary, providing a stronger financial safety net.

Other options may suggest limitations or conditions that do not reflect the standard coverage features of liability insurance in many commercial policies, which typically emphasize the critical protection that legal defense coverage provides.