Attorney Malpractice Insurance Claims Expenses

When considering needed liability limits often overlooked are claims expenses. This could leave an insured dramatically underinsured. Given the right set of circumstances, claims expenses can easily exceed $100,000. So, what are claims expenses? The current AIG policy defines claims expenses as:

“4. Claim expenses means:

a. reasonable and necessary fees charged by any lawyer designated by us;

b. reasonable and necessary fees and expenses charged by any lawyer selected by you as independent counsel, if a conflict of interest exists and applicable law permits you to select such independent counsel and requires us to pay for such independent counsel;

c. all other fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a claim, if incurred by us;

d. all costs allocated to you in suits or proceedings and all interest on the entire amount of any judgment therein which accrues after entry of the judgment and before we have paid or tendered or deposited the amount of such judgment, whether in court or otherwise, but only as respects that part of the judgment which does not exceed the limit of our liability thereof; and

e. premiums on appeal bonds and premiums on bonds to release attachments in such suits, but

not for bond amounts in excess of the applicable”

The two options for covering claims expenses are:

1.       Having the expenses as part of the liability limit, commonly referred to as Claims Expenses Inside the Limits (CEIL). Without a Claims Expenses Outside the Limits (CEOL) sublimit or endorsement the policy is CEIL. (This endorsement can be part of the policy language or an attached endorsement.) With CEIL, every dollar used for claims expenses reduces the liability limit by a dollar. With the liability limit exhausted, either through claims expenses or an indemnity payment, this fulfills the insurer’s obligation. A CEIL policy slang name is a ‘Burning the limits policy.’

2.       Having the Claims Expenses Outside the Limits of Liability (CEOL). CEOL is a separate liability sublimit for claims expenses (sometimes call defense costs). With CEOL claims expenses do not reduce the primary liability limit, unless the sublimit is exhausted.

Insurers offer different options for CEOL:

1.       The CEOL sublimit equals the primary limit of liability, sometimes called ‘Full’ CEOL.

2.       The CEOL sublimit is for a lessor set amount and may vary based on the liability limit chosen or ‘Limited’ CEOL.

3.       The CEOL sublimit is equal to the primary limit of liability up to a certain amount and capped after the liability limit exceeds a certain limit. This cap is often $1,000,000.

4.       The policy has a CEOL endorsement or is part of the policy language but contains no CEOL sublimit for claims expenses or unlimited CEOL.

How CEOL works:

CEOL pays claims expenses up to the CEOL sublimit. Once the CEOL sublimit is exhausted, additional claims expenses reduce the primary policy liability limit. With the liability limits exhausted the obligation of the insurer is fulfilled.

CEOL is not a substitute for having a liability limit insufficient to pay the indemnity costs of what a potential claim could cost.  A low primary liability limit makes no sense if it is not enough to cover potential indemnity payments even with the purchase of CEOL.   As an example, a firm is carrying a $100,000 limit of liability per claim with CEOL, and a claim is made against the firm that is evaluated to cost $200,000.  The malpractice insurer likely cuts its losses and writes a check for $100,000. This leaves the firm to fend for itself for remaining defense and indemnity costs. The underinsured damage costs could very well come from the firm member’s personal assets.

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