Are defense costs and prejudgment interest covered by liability insurance?

Liability insurance policies usually cover a list of additional payments that an insurance provider agrees to cover in addition to the liability limits of the insurance policy. Defense costs and prejudgement interest are two payments that are typically the obligation of the insurer to cover when a liability claim is filed.

Covering Defense Costs

Every liability policy has a provision in the insuring agreement, in which the insurance provider agrees to pay all the defense costs incurred during a liability lawsuit, in addition to the damages awarded against the insured.

This means that whatever the defense costs and the seriousness of the claim, it is the obligation of the insurance company to cover all the defense expenses up to the policy limit. Once the policy limit is reached, the obligation of the insurer to defend the insured ends and any further payments are entirely the insured's responsibility.

It is worth pointing out that defense costs are paid outside of the liability policy limits and they don't affect the amount available for covering any damages awarded to a third party. Thus, if one's liability policy has a limit of $300,000, and the defense costs have come up to $100,000, the money available for compensation remains $300,000.

To minimize defense costs, which are usually exorbitant, insurance companies usually try to reach an out-of-court agreement by negotiating settlement amounts with the third party.

Who Pays the Prejudgement Interest

The majority of liability insurance policies cover the prejudgement interest, which may be awarded to the third party on top of the compensation to make up for the fact that the claimant has not been indemnified immediately for the loss, but had to wait for the court decision before being awarded the damages. While some policies have the prejudgement interest in their list of supplementary payments, in other policies it is included in the policy limits.

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