What is the 'duty to defend' clause in liability insurance?

The 'duty to defend' clause in liability insurance refers to the insurer's obligation to provide a legal defense for the insured against claims made in a lawsuit, regardless of the merits of those claims. This means that even if the allegations are deemed unfounded or false, the insurer must still cover the costs associated with defending against those claims, including attorney fees and court costs.

This duty is a key feature of liability insurance because it protects policyholders from the potentially devastating financial impact of legal proceedings. By ensuring that the insurer is responsible for the legal defense, the policyholder is able to focus on resolving the allegations without the added burden of legal expenses. This aspect of liability insurance is generally broader than the duty to indemnify, which relates to the obligation to pay for any settlements or judgments once liability has been established.

In terms of the other options, the obligation to pay settlements out of pocket would misinterpret the insurer's role since the insurer typically covers these costs as part of the indemnity obligation. The clause that limits financial responsibilities does not accurately describe the nature of the duty to defend, which is expansive in nature. Lastly, requiring the insured to provide their own legal counsel contradicts the fundamental purpose of the 'duty to defend,' which is