If you’ve ever purchased an insurance policy, you have likely come across a bunch of acronyms and industry jargon. It can be frustrating to comb through an application or policy trying to determine one simple question, “Am I covered for this?”
At Protexure, we are frequently asked about the language and acronyms presented in applications and insurance policies. One popular item our clients ask about is claims expenses outside the limit (CEOL).
When receiving quotes for your professional liability insurance and choosing your coverage, you will have many factors to consider. One factor you will need to consider is how you would like claim expenses handled.
Each application is different in how it asks about this coverage but it all comes down to choosing between two options, claims expenses outside the limit of liability or claims expenses inside the limit of liability.
What Is CEOL?
Claims expenses outside the limits of liability (CEOL) is a coverage option where the limit of liability will only be applied to actual damages paid, with the expense benefit paid outside the limit of liability.
Rather than the defense costs eroding your policy’s limits, it provides an addition to your limits of liability. CEOL covers the defense cost for the carrier to hire legal representation to guide and represent you or the firm throughout a lawsuit if one arises.
For example, let’s say a law firm is looking to purchase coverage with a limit of liability of $1,000,000 per claim and a total of $1,000,000 in coverage for the policy term. If the law firm chooses CEOL, they would have a separate $1,000,000 in defense coverage added to their policy.
Think of CEOL as creating two “buckets” of coverage. One bucket is for settlement costs and a second bucket is for defense costs. With CEOL, if a firm faces a lawsuit, the defense costs will be paid out of the defense bucket and any settlement costs will be taken from the settlement bucket.
On the flip side, the other coverage option is claims expenses inside the limits of liability (CEIL). With this coverage, defense costs for the carrier to hire legal representation for you or the firm would erode the limits of liability.
For instance, if the firm had a $1,000,000 for each claim and $1,000,000 aggregate policy, and the defense costs added to be $100,000, the firm would only be left with about $900,000 in limits going forward until the end of the policy period.
If the defense cost ends up exceeding the limits, the firm would pay out pocket for the representation and settlement.
How Does CEOL Affect Premiums
At first glance, you might be thinking, why would I not get CEOL coverage? It just provides extra coverage, right? But, with the additional coverage comes additional cost.
With a typical CEOL policy you will see about a 10% to 15% increase in your premium. While some might be turned off by the price increase, it is important to keep in mind the firm is receiving more coverage for an additional couple hundred dollars.
Extra coverage does come at a price, but if a claim or multiple claims are ever filed, CEOL is a benefit worth having.
A few hundred dollars in your initial premium can save the firm thousands of dollars in the long run from claims.
Full CEOL vs Limited CEOL Options
Within CEOL there are two types of CEOL, full or limited. Typically, the carrier will dictate what type of CEOL they offer.
If a carrier offers “Full” CEOL, the extra defense costs will match the current policy’s limits of liability. Full CEOL is similar to the example we outlined above. In this scenario, if the law firm has limits of liability of $1,000,000/$1,000,000, the CEOL coverage would match the $1,000,000 aggregate coverage for the policy term.
The other option a carrier might offer is “Limited” CEOL, where the carrier sets a lesser amount of coverage outside the limit of liability. This coverage still goes towards the firm’s defense cost but the limited coverage isn’t equal to the policy’s limits.
On a policy with limits of $1,000,000 and limited CEOL, the policy will not provide defense costs equal to the limit of liability. It will be a lesser amount.
For example if the limits are $1,000,000 for each claim and aggregate, you may have a limited outside amount of $250,000. This limited CEOL option adds to your coverage but could leave you with $750,000 less in coverage.
CEOL vs CEIL
We have examined what CEOL is and how it can benefit law firms, especially those who face higher risk or more exposure to claims, but what about claims expenses inside the limits of liability (CEIL)? How do you know which of these options is better suited for your needs?
Unlike CEOL, where you gain extra coverage limits for defense costs, CEIL does just the opposite. The defense costs erode the firm’s overall limits.
CEIL is a common choice for law firms who practice in lower risk areas of the law. It is also a common choice for those focused primarily on keeping their premium costs down.
With CEIL, if a qualifying firm has a policy for $1,000,000 limits and during defense of a covered claim, the total expenses add to be $250,000, the expenses would erode the limits for settlement and future payout would be reduced to $750,000 for the remaining term of that policy period.
In some cases, the total payout will be the exact same no matter which option you choose.
Let’s say a law firm has a limit of $1,000,000/$1,000,000. This firm incurs a claim with $300,000 in defense costs and $500,000 in a settlement.
With CEOL $300,000 will be taken out of the “defense costs bucket” and $500,000 will be taken out of the “settlement costs bucket”. This will leave $700,000 left for defense costs and $500,000 left for settlement costs for the remainder of the policy period.
With CEIL the costs will be combined and $800,000 will be taken out of the limit of liability and $200,000 will remain for the rest of the policy period. Both policies will have paid out the same amount, but CEOL has a larger amount still available to you.
At first glance, CEOL seems like the better option because there would still be $1,200,000 in coverage left over for the remainder of the policy period.
But, if the likelihood of incurring another claim in the current policy period is low, then both options are virtually the same. There is no benefit to having extra coverage. In the above scenario, CEOL and CEIL will protect your firm the same regardless.
Should You Choose CEOL or CEIL?
Which option should you choose? It depends.
Much like with everything else in the insurance industry, it depends on your risk profile.
For law firms practicing in higher risk areas of practice where they are more likely to see a claim, or even multiple claims in a year, CEOL may be the better fit.
The most important thing to keep in mind is that CEOL is not designed to pay for everything. With the right professional liability policy, CEOL can help small law firms avoid the need to purchase a higher limit policy with large premiums.
However, it's not an emergency catch-all.
Higher risk firms may want to increase their limit amount in addition to adding CEOL since it doesn't increase the amount available for a possible settlement. CEOL is an important part of professional liability insurance, but it is not designed to make up for poor coverage.
In some cases, CEOL is a good idea, but oftentimes the best solution is to increase the firm’s limits of liability.
For example, $250,000/$500,000 limits with CEOL and $500,000/$500,000 limits with CEIL have similar costs. It is best to purchase the 500/500 CEIL compared to 250/500 CEOL because the increased limits better protect the firm. Rarely do defense costs reach the full limit amount.
Learning the facts about your firm's risk potential and which policy will best meet your needs is the right way to be prepared for any potential claim or lawsuit. Understanding the terms of your primary limits of liability and your chosen CEOL is vital to avoid facing nasty financial surprises in the future.
