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.
Author
Phil has been at OAMIC since 1989 and has served as president and CEO since 1993. He is past-president of the National Association of Bar Related Insurance Companies (NABRICO) and currently serves as secretary of the organization. He also serves as secretary of the Bar Plan Surety & Fidelity Company, is a board member of the National Association of Mutual Insurance Companies (NAMIC) and is a member of the Professional Liability Underwriting Society (PLUS). Phil has a Bachelor’s degree from Central State University (now University of Central Oklahoma) and is chair of the Edmond Economic Development Authority.