Liability claims bring two major expenses: the settlement or judgment itself and the legal costs to defend against the claim. For Central New York business owners, understanding how your general liability policy handles defense costs can mean the difference between adequate coverage and a significant financial gap.
Many business owners in Syracuse, Baldwinsville, and throughout Central New York carry policies without realizing how legal fees interact with their coverage limits.
At the Horan insurance agency, we help Central New York businesses understand the structure of their liability coverage. As an independent agency working with multiple carriers, we can discuss different policy structures and how they apply to your situation.
This article explains the two main approaches to defense costs in liability policies, illustrates how each affects your actual coverage, and provides guidance on evaluating your current policy structure.
How Defense Within Limits Reduces Your Available Coverage in New York
Under a defense within limits structure, your policy's total limit must cover both the claim settlement and all legal defense expenses. If you carry a $1 million general liability policy and face a lawsuit, every dollar spent on attorneys, expert witnesses, court costs, and legal fees reduces the amount available to settle or pay the claim.
Consider a CNY contractor facing a $600,000 lawsuit. If legal defense costs reach $300,000, only $700,000 remains from the original $1 million limit. Should the case settle for $600,000, the total payout of $900,000 leaves just $100,000 of the policy limit remaining for any other claims during that policy period.
This structure affects the actual coverage available to address the underlying claim, which matters particularly in New York's active litigation environment where legal costs can accumulate quickly.
Defense Outside Limits Provides Separate Legal Cost Coverage
With defense outside limits (also called defense in addition to limits), the insurance carrier pays legal defense costs separately from the policy limit. Your coverage limit remains fully available to settle or pay claims.
Using the same scenario, that CNY contractor with $1 million in coverage faces the same $600,000 lawsuit with $300,000 in defense costs. Under this structure:
- The carrier pays the $300,000 in legal fees separately
- The full $1 million limit remains available for the claim
- After a $600,000 settlement, $400,000 in coverage still exists for other claims
The policy limit stays intact for its intended purpose: addressing the actual liability exposure.
How to Determine Your Policy's Defense Cost Structure
Review your general liability declarations page and policy jacket. Look for language describing how the policy handles "Supplementary Payments" or "Defense Costs." The policy may state whether defense costs:
- Apply to and reduce the limit of insurance
- Are paid in addition to the limit of insurance
You can also contact your insurance agent to confirm your policy structure. Your agent can locate this information in your policy documents or contact the carrier directly for clarification.
When Defense Cost Structure Matters Most for Your Business
Legal defense costs vary significantly by claim type. In Central New York, certain business operations face higher legal expenses:
- Construction defect claims often require multiple expert witnesses and extensive discovery
- Professional liability cases against architects, engineers, and consultants involve technical testimony
- Premises liability claims may need accident reconstruction and medical expert analysis
- Product liability situations can demand extensive testing and documentation
Claims requiring substantial investigation, expert testimony, or extended litigation can generate legal fees reaching into six figures before any settlement discussion begins.
Questions to Ask About Your Coverage Structure
When reviewing your general liability policy, consider asking your insurance agent:
- Does my current policy provide defense within or outside limits?
- How do recent legal defense costs in my industry compare to my coverage limits?
- What options exist with different carriers for defense cost structures?
- How would a significant claim affect my remaining coverage under my current structure?
These questions help clarify your actual coverage position rather than just your stated policy limits.
Making Informed Decisions About Your Liability Coverage
The difference between defense within and outside limits affects how well your policy addresses legal expenses and claim settlements. For Central New York businesses facing the region's legal environment, this structure can determine whether your coverage limits prove adequate for both defense and resolution of claims.
The Horan insurance agency discusses policy structures with Central New York business owners to help them understand their current coverage. We work with multiple carriers to provide information about different options based on your situation.
Click the Get a Quote button below to discuss your general liability coverage structure and how it applies to your Central New York business.
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