The Insuring Agreements section of the insurance policy specifies that the insurance company has a duty and a right to defend any suit against the insured seeking damages for bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent. When liability coverage is purchased, the liability limit isn’t the only coverage you purchase. In most aircraft insurance policies, the legal defense expenses are paid outside of the policy limits, meaning the cost to defend the claim is not deducted from the policy limits available for judgments and settlements. The legal defense costs will likely pay for expert witnesses and some bail bonds, if necessary. The insurance company’s duty to defend ends when they’ve exhausted the limits of the policy with judgments and settlements. This is one of the key reasons to carry adequate liability limits.
The Severability of Interest clause provides a separate legal defense for each insured. Keep in mind, however, that the company’s duty to defend ends when the policy limits have been exhausted by the payment of judgments and settlements. When there are multiple insureds, the first insured case to settle could exhaust the policy limits ending the companies duty to defend the remainder of the insureds. The total number of insureds must be kept in mind when selecting a liability limit to ensure that there are plenty of liability limits in place to allow for the continued legal defense of all applicable insureds.
This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.