This issue recently came up with a client who did not want a ‘burning’ the limits attorney malpractice policy. The client went no further than the insurance proposal coversheet to come to a conclusion. In this case the client assumed (incorrectly) that Claims Expenses Outside the Limits meant that there was no coverage for defense costs. So what is ‘Burning the Limits’ Coverage?
‘Burning the Limits’ is insurance slang that is not defined in any malpractice policy. It is a seldom used term these days. Burning the Limits actually refers to a liability policy limit where for every dollar used to defend the claim, the amount available to pay the claim is reduced. In other words, you ‘Burn’ through the policy limit as you defend the claim. It is more properly referred to as Claims Expenses Inside the Limits (CEIL). A policy that does not ‘Burn’ through the limit is normally referred to as Claims Expenses Outside the Limits (CEOL) where there is a separate limit specifically for defense costs.
The purpose of CEOL is to provide a separate liability limit for claims expenses to help preserve the primary liability limit. The other option is Claims Expenses Inside the limits (CEIL).
All CEOL are not created equal. Different insurers offer different options for CEOL:
1. The CEOL limit equals the primary limit of liability, sometimes called “Full” CEOL.
2. The CEOL limit is for a lesser set amount and may vary based on the liability limit chosen. This is sometimes called “Limited” CEOL.
3. The CEOL limit 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 is often $1,000,000.
4. The CEOL limit has no cap for claims expenses or “Unlimited” CEOL.
How CEOL works:
CEOL pays for the claims expenses up to the limit set for CEOL. Once the CEOL limit is exhausted, the primary liability limit continues to be reduced until the primary limit is exhausted either through a combination of claims expenses or indemnity payments.
Having CEOL is not a substitute for having a liability limit sufficient 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 insurer’s obligation is done.
Other Considerations:
Plaintiff attorneys also need to be aware of the type of liability policy that a firm carries. Many times, this is the only substantial asset for the defendant. The plaintiff lawyer who engages in "scorched earth" litigation over an extended period of time may actually leave the plaintiff attorney’s client without a viable source of recovery. In this sense, ‘burning’ limits insurance policies may encourage plaintiffs and their counsel to resolve matters earlier than they might otherwise.
This school of thought might have some attorneys seeking lower limits with CEIL because they believe this will produce lower settlements if sued. This may or may not be true given specific facts and circumstances. It could a very risky approach to save money for insurance coverage, only to spend many times that amount to cover the actual assessed damages for inadequate liability limits.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
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