Defense costs outside the limit of liability

One of the most valuable features of Victor's Architects & Engineers professional liability program is defense costs outside the limit of liability. Available to design firms with billings up to $1M, this feature covers legal defense costs separarely from an insured's policy liability limits.

Defense costs outside the limit of liability explained:

Defense costs outside the limit of liability (DOL), otherwise known as additional claim expenses limit of liability, is a highly valuable feature of professional liability insurance for design professionals. This provision allows insureds to have their legal defense costs covered without impacting their policy's liability limits. As a result, the expenses incurred in defending a claim do not diminish the funds available for settlement or judgment, ensuring that insureds retain full access to their coverage in the event of a claim.

Without the protection of additional claim expenses limit of liability, defense expenses can quickly accumulate and deplete a policyholder's limit of liability, leaving them exposed to the risk of having to cover costs out of their own pocket. It's akin to having a single pool of funds that must cover both defense costs and claim settlements, potentially leaving policyholders with insufficient coverage.

Key benefits of additional claim expenses limit of liability include:

• Helps preserve coverage limits: Since defense costs are covered outside the policy limits, the full amount of the liability coverage remains available for settlements or judgments. This is particularly important in cases where legal fees can be substantial.
  
  
• Enhanced legal protection: Insureds can engage legal counsel without the concern that their defense costs will diminish their coverage limits. This can lead to more robust legal representation and a better defense strategy.
  
  
• Peace of mind: Insureds can ensure that their defense costs are adequately covered, allowing them to focus on their work with confidence, knowing that they have robust financial protection in place.
   

See this policy feature in action

A design professional holds a professional liability policy with a per claim limit of $500,000 and an aggregate limit of liability of $1,000,000. 

To enhance their coverage, the design professional made the decision to endorse the policy by opting for the "defense costs outside of the limits of liability" (25%) option, which incurred an additional cost of 5% of the total annual premium. This endorsement provided the design professional with an extra $125,000 claim expenses limit of liability (equivalent to 25% of the $500,000 per claim limit). 

Claim example

A claim is made against the design professional. The claim is reported with $40,000 paid in expenses only.  Since this claim falls under the category of expenses, the $40,000 defense cost will be deducted from the design professional's Defense Outside the Limits (DOL) limit of $125,000, rather than the $500,000 per claim limit. As a result, the design professional's remaining DOL limit will be $85,000, ensuring that they still have a substantial amount available to cover any future defense costs.

Several months later, the design professional was sued for professional negligence by a client, resulting in a total claim amount of $90,000. This claim consisted of $30,000 allocated for defense costs and a $60,000 indemnity settlement.

Considering the design professional's professional liability (PL) policy, which has a per claim limit of $500,000, the $60,000 settlement will be deducted from this per claim limit. However, the $30,000 defense cost will be covered by the remaining Defense Outside the Limits (DOL) limit of $85,000. 

Therefore, after this claim, the design professional had $55,000 remaining in their DOL limit ($85,000 - $30,000). 

To learn more, email design.us@victorinsurance.com or connect with your business development contact.