Georgia Property & Casualty Practice Exam

Under what circumstance would Lenny's insurance company terminate its defense in a lawsuit?

1. A.) Lenny was at fault.

2. B.) Lenny was not at fault.

3. C.) Lenny didn't like the insurance company's attorney.

4. D.) The insurer paid the limit of liability on Lenny's policy.

The correct answer is: D.) The insurer paid the limit of liability on Lenny's policy.

In a situation where Lenny's insurance company has paid the limit of liability on his policy, the insurer may terminate its defense in a lawsuit. This is due to the principle that once the insurer has fulfilled its financial obligation as outlined in the policy, such as paying out the maximum coverage amount for a claim, it no longer has any legal responsibility to continue defending the insured in the lawsuit. The insurance policy typically includes a provision that obligates the insurer to defend the insured against legal actions, but this duty is limited by the coverage limits. Therefore, once the payments reach the policy limit and the coverage is exhausted, the insurer can cease to provide legal defense. This is an important aspect of policy management and reflects the contractual obligations between insurers and policyholders. Understanding this principle helps ensure that individuals are aware of when an insurer's responsibilities may come to an end.