Knowing how your insurance policy handles defense costs can have a significant impact on your financial security. Having this knowledge is key to making a good insurance purchasing decision.
This article aims to demystify two critical terms in insurance policies: “Defense Outside the Limits” and “Defense Within Limits.” We’ll explore these concepts, discuss their implications using a practical example, and offer guidance on how to check your own policy. Whether you’re a small business owner, run a non-profit, or simply want to better understand Nevada’s new law, this article will help you grasp these critical aspects and why you should care about them.
Unpacking Insurance Terminologies: Defense Outside and Within Limits
Let’s start by understanding what these terms mean. Defense Outside the Limits (“DOL”) and Defense Within Limits (“DWL”) are phrases used in insurance to explain how your defense costs – like attorney fees and court expenses – are covered. Defense costs can add up quickly, so knowing how your policy handles them is essential.
In “DOL” policies, your defense costs are not subtracted from the aggregate limit – the maximum amount your insurer will pay for a claim. It’s like having a separate unlimited bucket of money just for defense costs. This means even after spending on defense, you still have your full policy limit available for any settlements or judgments.
On the other hand, “DWL” policies are the opposite. The money used for defense costs is taken from your policy limit, leaving you with less coverage for any claims payouts. It’s like having one bucket of money for both your defense costs and claim payouts.
Accounting for Defense Costs
So, what counts as defense costs? Typically, defense costs include
- fees paid to attorneys
- court fees
- costs of investigations
- expert witness fees, and
- other legal costs associated with defending a lawsuit.
Which Policies Fall Into Which Category?
Generally, Commercial General Liability policies often come with “DOL” coverage.
In contrast, most professional liability policies (like Directors and Officers Liability, Errors and Omissions, and Employment Practices Liability) offer “DWL” coverage. In some litigation-friendly jurisdictions, insureds may have the option to buy Defense Outside the Limits or Unlimited Defense Costs on professional liability policies for an additional premium.
As with any insurance matter, there are no hard and fast rules – always double-check your own policy and ask your broker for additional coverages that may be available for a cost. Let’s look at an example of how the two distinct defense provisions would pay out in a Not-For-Profit D&O policy:
Not-For-Profit Directors & Officers Liability Insurance: A Case Study
Let’s take a look at a concrete example using Not-For-Profit Directors & Officers Liability Insurance. Imagine a private golf club is sued for discrimination by a group of members. The total claim is for $1,300,000 ($1,000,000 for defense costs and a settlement of $300,000).
The club’s Not-For-Profit D&O policy has a limit of $1,000,000.
With a “DOL” policy, the insurer would cover the full $300,000 settlement and still pay $1,000,000 for defense costs.
However, if the private club had a “DWL” policy, that $1,000,000 used for defense would be subtracted from the overall coverage limit. This means, if the claim was successful, the insured’s coverage would have been exhausted by the $1,000,000 defense. This would leave the entity potentially responsible for the $300,000 difference.
Your Policy: Check It Twice!
How can you find out what your own policy offers? It’s straightforward. Look for a section in your policy titled “Supplemental Payments” or “Defense Provision.” Here, you’ll find the specifics of how your defense costs are handled. If you’re still unsure, reach out to your insurance broker for clarification. You may also find the coverage extension under a heading such as “defense costs outside the limits endorsement”.
Now, you might wonder why this matters to you. It’s simple. Limiting defense costs means less money for claim payouts, which could result in the entity or you as a board member paying out-of-pocket costs. Understanding your policy could help you avoid unnecessary financial risks. For instance, if your policy includes defense within limits you may consider buying higher liability limits.
Key Takeaways:
- the difference between “Defense Outside the Limits” and “Defense Within Limits” is not just a matter of insurance jargon.
- knowing your potential financial exposure and making informed decisions to protect yourself and your organization.
- insurance is all about peace of mind, and understanding your coverage is a big step towards that goal.
