When does a personal auto policy cease to defend the insured?

The correct answer is that a personal auto policy ceases to defend the insured when the limits are exhausted by payments. This is based on the principle that the insurance company’s responsibility to provide a defense is closely tied to the available coverage limits specified in the policy. Once those limits are fully consumed by payments made for claims, the insurer no longer has an obligation to defend the insured in lawsuits related to that claim or incident.

Insurance policies are designed to provide both defense and indemnity, but once the limits are drained, there are no longer funds available to cover further legal costs or settlements. Consequently, the defense obligation also ends. This is an important consideration for policyholders, as it emphasizes the need for adequate coverage limits to ensure they are protected if faced with significant claims.