Defense Costs

Example

“When the customer sued the restaurant for food poisoning, the general liability policy covered $25,000 in defense costs for attorneys and expert witnesses, even though the case was ultimately dismissed.”

Memory Tip

Think of defense costs as the price of your legal bodyguard - your insurance company hires lawyers to defend you, and these bodyguard fees are separate from any money you might owe if you lose.

Why It Matters

Defense costs can often exceed the actual damages in a lawsuit, making this coverage extremely valuable for policyholders. Without insurance, even frivolous lawsuits could result in devastating legal bills that bankrupt individuals or businesses.

Common Misconception

Many people think defense costs only apply if they lose a lawsuit, but insurance companies typically must pay these expenses regardless of the outcome. Also, some assume defense costs count against policy limits, but many policies provide defense coverage in addition to liability limits.

In Practice

A small business owner faces a $50,000 slip-and-fall lawsuit that takes two years to resolve. The insurance company spends $35,000 on defense costs including $28,000 for attorneys, $4,000 for expert witnesses, and $3,000 for depositions and court fees. Even though the case settles for only $15,000, the total insurance payout reaches $50,000, with defense costs representing 70% of the total claim expense.

Etymology

"Defense" derives from Latin "defendere" meaning "to ward off" or "protect," while "costs" comes from Latin "constare" meaning "to stand at a price." The insurance industry adopted this term to distinguish legal expenses from damage payments.

Common Misspellings

Related Terms

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See Also