Help! My legal fees have maxed out my insurance
This is often the lament of contractors embroiled in the litigation of costly claims.
“Help! My legal fees exhausted the limits on my insurance policy. What can I do now?”
This is often the lament of contractors embroiled in the litigation of costly claims.
Unfortunately, once the terms and conditions are set and the ink is dry on everyone’s signatures, the answer is: “Not much.”
The real-world truth is that insurance companies likely have no further obligation to either defend or cover claims once a policy’s limits are exhausted. As a result, the insured is often left totally responsible for all further expenses, which in many cases can be quite exorbitant given the state of today’s highly litigious environment. That’s because even seemingly frivolous claims involving relatively tangential project roles can prove quite expensive and time-consuming once the finger pointing starts. Insureds have been sued for simply being a project participant even though they were not actually involved in the problem at issue. An experienced attorney will find a way: Owners sue contractors. Contractors sue subcontractors. And on it goes until the whole situation blossoms into a technical and procedural mess.
But that’s why professionals have insurance — to cover the work performed as long as the terms and conditions are met and the limits of liability exist after the claim is settled one way or another. Many insureds don’t realize the expenses that can add up rather quickly once the entire process starts. Investigators, lawyers and other consultants typically bill hundreds of dollars per hour. Expert witnesses have been known to charge $100,000 or more to testify in court. Arbitrators, and oftentimes there’s more than one, commonly receive $500-plus an hour. Add it all up and it’s easy to see how the costs to defend a claim can consume, if not totally deplete, the insured’s policy limits well before the entire situation reaches its logical conclusion.
Plus, once a plaintiff has the wherewithal, means and determination to sue, no matter the baseless nature of the claim, there is little a defendant can do but see it through. One extreme example concerns the $80,000 design, build and fabrication of a steel spiral staircase. The homeowner thought it “squeaked too much.” Even though the case was eventually dismissed, the process totaled more than $200,000 in legal fees. Another example surrounds a $1.7 million home theater built into an existing residence. After several flooding events, the homeowner sued 13 subcontractors, including the architect. The case against the architect was dismissed after four years in litigation and at an immense cost to everyone involved.
Defense outside the limits of liability
When it comes to claims, defense and legal expenses are typically incurred as the case is investigated and defended in coordination with the policyholder’s insurer. Make no mistake: This process could last for months, or even years, while expanding from the reporting phase through the entire array of document reviews, pleadings, discovery, depositions and court and arbitration hearings.
Unless stipulated otherwise within the policy language, these costs will reduce the policy’s limits. When some measure of defense outside the limits is provided, the insurer is obligated to defend the insured and pay on their behalf claim expenses, which may be applied in excess of a deductible/retention, in the amount set forth in the policy without reducing the policy limits. In contrast, defense within the limits means that the defense costs incurred during a claim’s investigation, defense and resolution would erode the policy limits that would otherwise have been available to pay for the loss and related damages.
For instance, if a claim resulted in $100,000 in defense and legal expenses on a policy without any measure of defense outside the limits of liability, the coverage’s limits would be reduced by the same $100,000. With a defense outside the limits provision, a policy with a $1 million limit would retain the same limit even after the defense and such legal fees were paid. This is a fundamental benefit that could very well make the difference between having the entire limit available to pay a claim or an insured falling deep into a financial hole after everything is settled.
Terminology matters
While some measure of defense outside the limits is typically included in most contractors general liability (CGL) and some contractors pollution liability (CPL) policies, the benefit is available within contractors professional liability (CPrL) programs. An important factor in ascertaining whether the benefit is provided, and to what extent, is understanding the language of the relevant clauses which can differ greatly among carriers.
For instance, CPrL carriers have been known to provide defense outside the limits as a percentage of the per claim limit (seen more frequently as applies to the Professional Liability coverage) or as a cap designed not to exceed a specific amount. They can also be set forth within the policy’s declarations; included under a supplementary payment section; or added via an endorsement. In each instance, the terms could be stated as:
- Defense costs outside limits of liability.
- Legal defense in addition to limits.
- Separate aggregate defense limits.
- Via supplemental payment — all expenses we incur.
- Or NOT PROVIDED with language that explicitly states that defense costs/claims expenses will be used to erode the limits in policy,
Understand your insurance
As with most insurance policies, the careful selection and inclusion of every written word is critical for ensuring the proper fulfillment of its terms and conditions, especially when costly scenarios and disputes occur. That’s why insureds should pay particular attention to the language delineating enhancements like defense outside the limits coverage. The last thing any contractor or professional wants to learn is that their legal fees have either been exhausted or are about to exhaust their policy limits.
Unfortunately, there’s no magic wand that can be waved once the policy’s limits are exhausted. That’s why it’s always highly beneficial to have a thorough understanding of the relevant language in an insurance policy.
Drew Rothman is a Consultant in RT Specialty’s Environmental and Construction Professional Practice (RT ECP). He can be reached at drew.rothman@rtspecialty.com. RT ECP is a part of the RT Specialty division of RSG Specialty, LLC, a Delaware limited liability company based in Illinois. RSG Specialty, LLC, is a subsidiary of Ryan Specialty Group, LLC (RSG). RT ECP provides wholesale insurance brokerage and other services to agents and brokers. RT ECP does not solicit insurance from the public. Some products may only be available in certain states, and some products may only be available from surplus lines insurers. In California: RSG Specialty Insurance Services, LLC (License #0G97516). ©2021 Ryan Specialty Group, LLC.
As a partner at Bardsley Benedict + Cholden, LLP, Steven G. Bardsley has 30 years of construction mediation and litigation experience. He can be reached at sbardsley@bbclawfirm.com. Headquartered in Philadelphia, Pa., Bardsley Benedict + Cholden, specializes in professional liability, environmental law and construction law cases held before state and federal courts or in arbitration forums.
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