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Lee NorcrossCEOL stands for Claims Expenses Outside the Limits of Liability.  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.  If there is no CEOL sublimit then the policy will have the Claims Expenses Inside the Limits (CEIL).   With CEIL, every dollar used for claims expenses reduces the liability limit by a dollar.  Once the limit of liability is exhausted, either through claims expenses or an indemnity payment, the obligation of the malpractice insurer is fulfilled.  A CEIL policy is sometimes referred to as ‘Burning’ the limits policy.

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 limit of liability chosen.  This is sometimes called ‘Limited’ CEOL.

3.       The CEOL sublimit is equal to the primary limit of liability up to a certain amount and is capped after the limit of liability 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 and is referred to as unlimited CEOL.

How CEOL works:

CEOL pays for the claims expenses up to the CEOL sublimit.  Once the CEOL sublimit is exhausted, the primary liability limit is reduced until the primary limit is exhausted through a combination of claims expenses or indemnity payments.  Again once the liability limit is exhausted the obligation of the insurer is fulfilled.

Having 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.   Remember once the primary liability limit is exhausted the malpractice insurer’s obligation is done.  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 will likely cut its losses and write a check for $100,000.  This would leave the firm having to fend for itself for remaining defense and indemnity costs.

A school of thought exists with some attorneys that lower liability limits, produce lower settlements.  This may or may not be true given specific facts and circumstances.   This lower limit approach is a very risky approach to save a ‘little’ money on the insurance liability limits, only to spend many times that amount to cover the actual assessed damages for inadequate liability limits.  The underinsured damage costs could very well come from the firm member’s personal assets.

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