Professional Liability Terms and Usage Part II

CEOL/DOL/DIAL: These are all variations on the same concept; the policy's aggregate limit will not be reduced by claim payments. But it's not that simple, so keep reading.

The abbreviations stand for Claims Expense Outside the Limit, Defense Outside the Limit and Defense In Addition to the Limit. They all share the same concept and meaning, but there are way too many variations, so read the wording and make sure what is listed and defined is clear to you.

Some of the policies that are more current will have this wording as part of the basic policy form. If it's not in the basic form it might be included by endorsement, so if you're doing a comparison make sure you note any additional endorsements or the absence of same.

Some policies will state that the carrier will pay an unlimited amount of claims expense in addition to the policy limit. Some will only provide claims expense equal to the per claim or aggregate limit and others will offer claims expense in addition to the policy aggregate, but only at a sub-limit and as you might guess, that sub-limit could be less than the policy aggregate limit.

Make sure you read the wording closely. It's easy to fall into the trap of making assumption, i.e. start thinking about the word "claims" and assume it means payments/settlements (indemnity), others think attorneys fees (claims expense or defense costs) and still others assume it means both. This just in from the department of redundancy departement: read the wording!

By example, Arch the local architect buys a $500,000 per claim limit with a $500,000 annual aggregate limit. The policy provides defense coverage in addition to the limit of liability (claims expense outside the limit). Arch reports a claim, the carrier chooses to defend and does not settle. The carrier pays $100,000 in claims expense (legal fess primarily) and zero in indemnity, i.e. they pay no damages. Under the policy the $500,000 aggregate limit remains in tact and is not reduced by the claim expense costs/payment.

If on the other hand Arch purchased an architects E&O policy with claims expense included in the limit (defense costs within the limit) then the $100K claim expense payment would reduce the policy limit to $400,000 for the remainder of the policy term.

For other examples you can see that if you increase the claim payment amount and/or reduce the limit of liability that's purchased, deterioration or erosion of the policy limits can potentially be a significant issue. Whatever limit and option you offer your client, make sure they understand how the limits will work in the event of a claim. (And yes, I know, your client believes he or she will never have a claim. I'm still working on THAT blog entry...)