Depleting Limits Policies and Policy Limits Demands

Depleting Limits Policies and Policy Limits Demands

I was recently asked to participate on a panel at the upcoming annual Professional Liability Defense Federation Conference.  The program is entitled is “Depleting Limits Policies and Policy Limits Demands: Effects on Independent Counsel, Allocation, Reimbursement, and Bad Faith”.  As the title suggests, the discussions will focus on insurance policies where the cost of defense of a claim erodes the limit of liability from the defense counsel or insurance company point of views. These same issues are equally critical to the insured professional as the subject insurance policies that are also known as “burning limits”, “wasting” or “defense within limits” policies lessen the amount of insurance coverage available to defend or pay a claim or lawsuit.  In other words, each dollar paid in the defense of a claim increases the risk of uninsured (and personal assets) exposure to the insured professional.

The first and obvious issue is whether the insurance policy in question is an “eroding” limit policy.  It is possible that, even If you were the person involved in obtaining the policy, the significance of this may have been overlooked or at least not given great consideration when compared to the fact that a “burning limits” policy is less expensive (sometimes significantly) than a traditional policy where the cost to defend is in addition to policy limits.  Some insurers disclose the “defense within limits” in bold letters on the declarations page of the policy, where others place language within the policy itself usually under the section “Defense, Settlement…” and reads something like the insurer “shall not be obligated to pay any Claim, judgment, Claim Expenses (i.e, defense costs) … after the applicable limit of liability has been exhausted by payment of judgments, settlements or Claim Expenses.”

If you have a “wasting” policy providing coverage for a claim, be mindful that defense counsel, usually retained by your insurance company, is faced with competing business and ethical issues.  The insurance company (typically the source of business) usually wants the defense lawyer to take all necessary steps to limit its indemnity exposure, where the policyholder (the client) will want his or her attorney to do what is only reasonably and effectively necessary to keep as much of the policy limits intact.  In an effort to avoid a clash between the insurer and the policyholder, the defense attorney should provide a detailed litigation budget with the pros/cons of each proposed activity that should be updated as the claim or lawsuit proceeds and activities are undertaken for all involved to make an informed decision.

The insurance company is faced with its own issues, especially where the potential exposure of a claim exceeds the limits of the insurance policy.  In many jurisdictions, the insurer may have an affirmative duty to initiate settlement discussions under such a scenario, even in the absence of a demand.  That being said, most courts will leave the decision to litigate or settle to the insurer so long as it is based on a reasonable assessment of the policyholder’s defense and likelihood of success.

It is therefore necessary to keep in mind what the insurance company can do when there are multiple claims, lawsuits, or plaintiffs against one insured, or when there are multiple insureds being defended under one “cost inclusive’ insurance policy.  This is also a jurisdiction based consideration as some courts will allow an insurer to accept a settlement offer involving less than all of the insureds effectively leaving a professional insured to be wary of multiple plaintiffs or other insureds who may be jockeying to use the limits first.  A contrasting view is that an insurer cannot favor the interests of one insured over another, and an insurer can breach this duty by settling and not obtaining a release for all of the insureds.  One of the threshold questions to ask your lawyer is whether your jurisdiction applies one of the following rules “pro-rata” (available limits are applied proportionally based on injury severity or number of insureds); “first come-first serve” (claims paid as they are settled or adjudicated}; settling more smaller claims  first; or, settling higher exposure claims first.

By: Dean L. Milber, JD/MA, Director of Claims and Business Development, Lancer Claims Services

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