What happens to the defense obligations when the limits of the insurance are exhausted?

When insurance policy limits are exhausted, the obligation of the insurer to provide a defense for the insured typically ceases. This is because insurers generally are obligated to defend their policyholders until the limits of coverage are fully utilized. Once these limits are exhausted, the coverage provided by the policy no longer applies, and as a result, the insurer is not required to continue providing legal defense services.

In many liability policies, the duty to defend is tied directly to the limits of coverage. After the limits are reached, the policy essentially is considered to have fulfilled its financial responsibility, and the obligation to defend against claims is no longer active. This means that the insured must then take responsibility for their own defense or any further associated legal costs. As a result, the termination of defense obligations aligns with the exhaustion of coverage limits, making this the correct understanding of the situation.