If you are a solo attorney or have a small firm, managing the cost of legal malpractice insurance is very important. It is one of the essential costs you must budget for every year. With insurance premiums rising over the past few years, driven by so-called nuclear verdicts (lawsuits with damages reaching over $10 million), it is more important than ever to understand exactly what goes into your malpractice coverage.
This article provides a detailed look at the differences between Claim Expenses Inside the Limit of Liability (CEIL) and Claim Expenses Outside the Limit of Liability (CEOL) coverage so you can make an informed decision about your legal malpractice insurance.
With CEIL, the amount paid by the insurer to defend you, the insured, against a claim or suit reduces the policy's applicable limit of insurance. In other words, any defense costs you incur are deducted from the available limit of liability. Defense costs include attorney’s fees, court costs, investigation, and filing legal papers.
Ultimately, CEIL reduces the coverage available to pay the actual damages from a claim through settlement or a court ruling.
Let’s assume you are the ABC Law Firm. You have malpractice insurance with a limit of liability of $1,000,000, and you chose CEIL coverage.
You have a malpractice claim from a missed filing date. Your client files suit against you for malpractice. Your insurance company has been notified and has begun investigating the claim.
One of your clients files a malpractice claim related to a contract error. The case is serious but not catastrophic. Defense costs (expert witnesses, depositions, motions, etc.) total $100,000, and the claim ultimately settles for $450,000. Because defense costs are taken out of the same $500,000 policy limit under CEIL, your insurer first pays the $100,000 in legal expenses, leaving $400,000 available for settlement. Your firm is responsible for the remaining $50,000 of the settlement out-of-pocket.
That scenario can (and does) happen.
A more common scenario is that you have a $1,000,000 policy and have chosen CEIL coverage. This time, it is determined that the claim is worth $250,000. Defense costs are still $100,000, and the available policy limit is still $900,000.
In this situation, your firm would not have any out-of-pocket expenses, as plenty of coverage is still available to pay the damages after the defense costs have been deducted from the limit.
The main advantage of CEIL coverage is the cost. Choosing CEIL instead of CEOL on a legal malpractice insurance policy will typically save you about 10% on your premium cost. These savings can vary, but you will almost always have a lower premium when choosing CEIL.
In certain situations, a law firm may be contractually required to carry a specific limit of liability. For instance, a firm may have an important client that requires the firm to have a particular limit of liability.
Another example is when a law firm wants to be included in the local or state bar association’s lawyer directory. Typically, the firm must carry coverage at a specific limit to be included on that list.
However, in both examples, the law firm’s exposure could be significantly less than the limit requirement. In this case, the firm should feel comfortable choosing the CEIL coverage option because they are not likely to hit their aggregate limit.
Also read: Critical Questions to Ask Before Purchasing Legal Malpractice Insurance
The disadvantages of CEIL depend on your firm’s risk profile. If, from time to time, your firm handles higher-risk cases or cases of high value, then you might want to reconsider your coverage choice. Your firm is now exposed to the risk of being underinsured for a large claim and could be required to pay out of pocket for some damages.
CEOL stands for Claim Expenses Outside the Limit of Liability (also known as Claim Expenses in Addition to the Limit of Liability). The purpose of CEOL is to provide additional coverage for claims expenses to help preserve the limit of liability.
If you choose this coverage option, your policy has a separate liability limit set aside for all defense costs associated with legal malpractice insurance. This leaves the policy's limit of liability preserved for payment of damages from a claim.
When shopping for an insurance policy, not all CEOL is equal. Some carriers say they offer CEOL coverage, but if you look closer, it is limited by a specific dollar amount or a percentage of the limit of liability.
At Protexure, the CEOL coverage option is equal to the limit of liability you have chosen. For example, if you select a $1,000,000 per claim limit with a $2,000,000 aggregate limit, the Expense limit is also $1,000,000 per claim and $2,000,000 aggregate. That is a lot of extra coverage available for defense costs for a relatively low additional cost.
Continuing our previous example, the same scenario applies, except you now carry CEOL coverage. You have $1,000,000 per claim limit and full CEOL. With full CEOL, you have an additional $1,000,000 for all costs related to the defense of the claim.
Once again, we have a case with a value of $1,000,000. The defense costs are $100,000. Now that you have CEOL coverage on the policy, your policy will pay for the defense costs of $100,000 and will pay the claim value of $1,000,000. In this scenario, your firm will not owe any money out of pocket.
Here is an entirely different scenario:
Let’s assume the limits with CEOL are now $100,000 per claim, so you have another $100,000 for expenses.
This time, you and your defense team have decided this is a defensible case. The defense costs a total of $150,000. You win, but the expenses were over the $100,000 policy limit. Who pays the remaining $50,000 in defense costs? The good news is that the policy covers it.
Once the limit for defense expenses is completely eroded, the policy will act as if you have CEIL, and the initial limit of liability will pay for those defense expenses.
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The main advantage of this coverage is peace of mind. Many firms are willing to pay about 10% more in premium to feel comfortable that if they get an occasional larger case, they have enough coverage if anything goes wrong.
The disadvantage of carrying CEOL coverage is that there is an additional premium. It is also essential to understand that having CEOL is not a substitute for having higher liability limits. The limit you have chosen for damages is still the same, and the carrier will not pay above that limit for a settlement or court ruling. For this reason, you must select the correct liability limit for your firm.
Research legal malpractice insurance costs and how they affect your bottom line. Talk to your insurance professional and ask questions. When getting competitive quotes, ensure you understand what coverages are being offered. Are you actually getting an apples-to-apples quote with the same coverages?
Ask yourself:
There is no right or wrong decision when choosing between CEIL and CEOL. If you have done your homework and discussed the options with your carrier, you can feel confident you’re making the right decision for your law firm.
Questions about the cost and coverage of legal malpractice insurance? Protexure Lawyers is here to help. Get in touch.