The Best Defense Is a Good (Policy) Offense
Defense Inside the Limits vs. Defense Outside the Limits
In everyday life, the words “inside” and “outside” are easy to define and understand. In the world of insurance, especially in the senior living industry, this task becomes a bit more challenging. That said, understanding whether defense costs are INSIDE the limits or OUTSIDE the limits is crucial.
While all insurance coverages are important, General/Professional Liability (GLPL) insurance is often viewed as the most critical coverage to have in place for a senior living community. This is the policy under which you're likely to see the most claims both in terms of frequency and severity. Assuming you’ve worked with your broker to ensure you have the appropriate limits of liability on your GLPL policy, you now need to understand how these limits will apply to paying the claim.
First, let’s look at the definitions:
- Defense Inside the Limits – Amounts paid by the insurance company to defend the claim or suit will erode, or decrease, the policy limits.
- Defense Outside the Limits – Amounts paid by the insurance company to defend the claim or suit are in addition to the policy limits and will not decrease the per occurrence claim limit. There may be a separate limit for Defense Costs, or it may not be capped, depending on the policy.
Now let’s apply these definitions to a claim example. You receive a lawsuit from the family of a former resident who passed away unexpectedly at your community. Upon receipt of the lawsuit, you notify your GLPL insurance carrier, and they immediately get their defense team working on the defense of this lawsuit. After months of discovery, investigations and negotiations, the case is finally ready to settle. During these months of defending the claim, you’ve incurred $400,000 in legal fees. Assume your GLPL policy has a $1M per occurrence and a $0 deductible.
If Defense Is Inside the Limits… The $400,000 of legal fees will erode the $1M limit, leaving only $600,000 to pay the actual claim rather than the original $1M. This leaves you a smaller amount of money from which to pay the claim, and any claim settlement more than the remaining $600,000 would come as an out-of-pocket expense.
If Defense Is Outside the Limits… The $400,000 legal fees will be excess of and will not erode your $1M limit, leaving full limits available to pay the actual claim. Any claim settlement up to $1M will be covered by the policy limits.
In this example, the legal fees were only $400,000, but as you can imagine, legal fees can add up pretty quickly when defending claims. What happens if your legal fees were to exceed $1M and your policy was Defense Inside the Limits? Not only would you have to pay any legal fees excess of $1M out-of-pocket, you’d have to pay the whole settlement amount out-of-pocket as well. Suddenly, what you thought was adequate insurance limits to cover any potential claims is not really helping you at all.
To conclude, it’s imperative you understand whether your policy is a Defense Inside or Defense Outside policy. The most important takeaway is that a policy that has Defense Inside the Limits will essentially have a lower per occurrence limit than a policy that has Defense Outside the Limits. As such, it may be necessary to buy additional Excess Liability limits to ensure your senior living community is adequately covered.
Contact a memeber of the 'A' Team for more ways to minimize risk while maximizing health in your senior living community.
- Liability E-Book
- The Lowdown on EPL Insurance for Senior Living Communities
- Senior Living Case Study: $105k Reduction in Claim Losses
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