How are defense costs handled under automobile liability coverage?

Under automobile liability coverage, defense costs are treated as expenses that are over and above the limit of liability set forth in the policy. This means that the insurer will cover the costs associated with defending against claims or lawsuits, such as attorney fees and court costs, without reducing the policy's liability limits available for settlement or judgments.

This approach is advantageous for policyholders because it ensures that even if the defense costs are substantial, the total coverage available for liabilities that arise from the accident remains intact. As a result, the insured can be better protected from potential financial losses stemming from legal proceedings related to automobile liability claims.

In this context, when considering the other options: if defense costs were included in the liability limit, it could lead to insufficient funds to settle claims, and if they were not covered at all, it would expose policyholders to significant out-of-pocket expenses. Conversely, requiring a deductible for defense costs is not a standard practice in automobile liability policies, which typically focus on comprehensive protection without additional out-of-pocket barriers for legal defense.