Under what circumstance would Lenny's insurer terminate its defense of a lawsuit after a car accident?

The correct choice highlights a significant aspect of how liability insurance operates. When an insurer provides a defense in a lawsuit, they typically cover legal costs up to the limits set in the policy. If the insurer has already paid out the full limit of liability under Lenny's policy in relation to the accident, they may decide to terminate their defense. This is because their obligation to provide defense services is closely tied to their financial exposure; once they reach the limit, they are no longer responsible for further claims or legal representation for that case.

In contrast, the other options revolve around fault or personal dissatisfaction with the attorney, which typically would not be grounds for terminating the insurer's obligation to defend Lenny. Insurance companies usually have a duty to defend their insureds as long as the claim falls within the terms of the policy, regardless of who is at fault in the accident or whether the insured is unhappy with the legal representation provided.