I recently had a discussion with an insurer about whether defense costs were included within the policy limits of a client’s coverage or in addition to policy limits. This was an important discussion because if costs of defense were included in the policy limits, my client was going to exceed those policy limits in a hurry. How would this situation play out with your insurance?
Fortunately, the majority of insurance policies, such as Commercial General Liability (CGL) policies, provide that defense costs are “in addition” to the policy limits. But some policies, often times referred to as “burning limits” policies, provide that the cost of defense is included in the policy limits. This means that if you have $1,000,000.00 policy limits, your costs of defense will reduce that limit throughout the course of litigation.
When the claim is substantially less than your policy limits, this will probably not be a problem. But, if the claim is near your policy limits, this may leave you or your company personally on the hook for the excess.
So, why would you buy a burning limits policy? Because they are cheaper, often times a lot cheaper. And, you may still get a certificate of coverage that indicates that you have policy limits of $1,000,000.
Take Away: I recommend you review your insurance policy or visit with your insurance agent to determine whether costs of defense are included within or are in addition to your policy limits. Otherwise, you might be having this conversation during litigation and finding out you have a burning limits policy.