Most liability insurance contracts treat defense xpenses as outside the policy limit. Such is not the case in defense-within-limits (DWL) policies, though. Detractors call them wasting,
cannibalizing or self-liquidating policies since defense fees can
consume the policy limit. DWL policies appear prominently in
D&O coverage, legal and medical malpractice policies and now
in some commercial general liability policies.
Defense-within-limits policies are attractive to insurers and
policyholders alike. For insurers, capping the company’s responsibility for legal fees is appealing. Instead of funding unlimited
defense fees, an insurer knows that on a $1 million policy, it will
pay no more than $1 million in legal fees and settlement payments, max.
Such policies also give policyholders financial responsibility regarding legal cost management. Policyholders who might
desire a gold-plated defense, lobbying insurers to hire off-panel
counsel at $600/hour, may forego such demands when they realize that every dollar spent on lawyers is one less dollar available
for settling claims.
Since the insurer’s exposure to whopping legal fees is limited,
Avoiding Bad Faith Perils of
Defense-within-limits policies may also appeal to an unlikely
and perhaps unwanted sector, namely plaintiff attorneys. Policy-
holder lawyers may advance bad faith theories against carriers
that write defense costs-within-the-policy-limit. Plaintiffs may
try to advance emerging theories on various grounds. Here are a
quartet of bad faith claim landmines can detonate from defense-
By Kevin Quinley, CPCU
Denying coverage to an additional insured
or denying the AI separate counsel could,
in either case, trigger bad faith claims.
Granting coverage to an AI or providing
it with separate counsel can invite bad
faith claims from named insureds.