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 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, you may find that the company is on the hook for any excess claim over the remaining limits.
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: Review your insurance policies and determine whether costs of defense are included within your policy limits before any claims are made. Otherwise, you might be having this conversation during litigation and finding out you have a burning limits policy.