Liability Insurance: Triggers, Limits, and the Duty to Defend
Liability Insurance tests whether you can read a third-party policy as a set of interlocking promises: the insurer promises to pay sums the insured becomes legally obligated to pay, and separately promises to defend the insured against claims seeking those sums. The exam probes coverage triggers, limit structures, who qualifies as an insured, and the exclusions that routinely defeat otherwise valid claims.
Coverage trigger: occurrence versus claims-made
On an occurrence form, the injury or damage itself must happen during the policy period; the date the claim is reported is irrelevant, so long-tail exposures can surface years after the policy expires. On a claims-made form, the claim must be first made against the insured and reported to the insurer during the policy period (or an extended reporting period), and the injury must fall after the retroactive date. Misreading which trigger applies is the single most common error in this domain.
Limits and the defense obligation
Standard structures include a per-occurrence limit, a general aggregate, and a products-completed operations aggregate; personal and advertising injury carries its own sublimit. On occurrence forms, defense costs and supplementary payments such as bail bonds and lost earnings typically sit outside the limit of liability; many professional and claims-made forms make defense costs inside the limit, so defense erodes coverage. Multiple claimants from one accident generally count as one occurrence.
Worked example
A contractor holds an occurrence-form policy with a $1,000,000 per-occurrence limit, a $2,000,000 general aggregate, and defense outside limits. A visitor and an employee of a subcontractor are both injured in a single scaffold collapse during the policy year; suit is filed two years later. This is one occurrence, so the insurer pays up to $1,000,000 in damages for both claimants combined, pays defense costs in addition, and reduces the aggregate only by the damages paid. If the same policy were claims-made with defense inside limits, the $1,000,000 would also have to absorb legal fees.
Traps that cost marks
The duty to defend is broader than the duty to indemnify and can exist even for groundless suits. Watch for the employer's liability exclusion, care-custody-control, pollution, professional services, and the insured-contract exception. Notice conditions and the retroactive date on claims-made forms are frequently tested, as are the limits that no defense payment can penetrate.