September 05, 2017 Top Story

Defense Costs May Erode Insurance Policy Limits

Careful review of policies and reservations of rights letters is critical

C. Thea Pitzen

A federal appellate court decision underscores a notable risk of purchasing a defense-within-limits insurance policy. The U.S. Court of Appeals for the Fifth Circuit held that defense costs paid in underlying litigation did, in fact, erode the policy limits.

Appellate Court Emphasized Policy Terms

The insurance policy at issue in this coverage dispute contained provisions stating that the insurance company would pay—on behalf of the insureds—“Loss for which the Insureds become legally obligated” on account of a qualifying claim. The policy also contained specific language indicating that policy limits would be reduced—and might be exhausted—by defense costs.

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