PHIL’S CORNER: What Do Split Limits Mean?
Phil’s Corner is a special column from OAMIC’s President & CEO Phil Fraim that is sent in our e-newsletter each month.
Most professional liability polices provide different limits, or maximum dollar amounts that will be paid, for different areas. This differs from a typical general liability (GL) policy that is normally written on a combined single limit (CSL) basis. As an example, a 1M CSL GL policy will pay a maximum of $1 million, regardless of whether the claim involves bodily injury (BI), property damage (PD) or even a combination thereof.
In a lawyers professional liability policy, you may see a limit listed as 200,000/600,000, often referred to as 200/600. The first number indicates the maximum per claim and the second number is the aggregate for the policy year.
In the limit example above, I like to say the most that will be paid on any given claim will be $200,000 and the total of all claims in a policy year cannot exceed $600,000. Is the 200/600 limit adequate? That answer depends upon several things and, as with any similar consideration, it often becomes a cost/benefit analysis. You can see more discussion on the adequacy of limits in my previous article “If LPL Is Important, Are Limits Also?”
Remember that with a professional liability policy (an errors and omissions policy, or E&O) or a directors and officers (D&O) policy, there is the issue of defense costs. These are more often than not included in the per claim limit. This means that costs incurred to defend a claim reduces the per claim limit.
In the case of OAMIC policies, we have claims expense allowance. This allowance ($100,000 for all limits except 100/300, which is $50,000) is applicable to defense costs only and is provided in addition to the per claim limit (except in the case of a securities-related claim). The first $100,000 (or $50,000 for 100/300 limit policies) spent in defense does not impact the per claim limit. Costs to defend above the $100,000 begin to reduce the per claim limit on a dollar-for-dollar amount.
An example of how the claims expense allowance works:
If the limit is $1M/$1M and the defense costs are $200,000, the first $100,000 is covered by the claims expense allowance while the second $100,000 reduces the per claim limit, leaving $900,000 for indemnity.
Hopefully, this adds to your understanding regarding your policy limits. Please don’t hesitate to contact us if we can explain things further.