When it comes to legal malpractice insurance, there are a plethora of insurance terms and policy features insurance agencies and carriers throw around and expect everyone to know what they are.
As a lawyer, you have a lot on your plate already, and learning the ins and outs of the insurance industry shouldn’t be necessary to secure a legal malpractice insurance policy.
As a Renewal Account Executive at Protexure Insurance Agency I work with hundreds of lawyers every year who are navigating the insurance landscape to protect their law firm.
One question I receive frequently is, what are split limits of liability and do I need it?
What Are Split Limits of Liability?
Split Limits of liability are the maximum dollar amounts the insurer will pay for different components of each claim and/or for different claims overall.
These are generally divided into two types:
- Per Claim Limits: The maximum amount of coverage available for each individual claim under the policy during its term.
- Aggregate Limits: The maximum amount of coverage available under the policy overall, no matter how many claims arise during its term.
The split limit option provides an added aggregate limit that is a multiple, typically 2 or 3 times the per claim limit you select.
For instance, in addition to receiving a quote for a $1,000,000 limit, you may also be offered a quote for a $1,000,000/$2,000,000 limit. Under this option you still have a maximum limit for damages and defense expenses per claim of $1,000,000 similar to the single limit offering. In addition, the split limit feature provides an additional $1,000,000 limit in the event that the first $1,000,000 is depleted by a claim or multiple claims.
Should You Carry Split Limits of Liability?
Is it best to carry split liability coverage in case your firm has more than one claim during the policy period?
Unfortunately, like with most things in the insurance industry, the answer is: it depends.
Split limits of liability can be more beneficial in some situations than in others.
In the event that two or more claims occur during the policy period, carrying split limits may be best. However, the chance of having multiple claims occur during the policy period is not that likely.
Making the decision to purchase split limit coverage can be a challenging decision. It will ultimately come down to the number of claims that could be anticipated during the year, the estimated value of the claims, and the limits that the firm is most comfortable with.
It is important to consider the amount of work you have done in the past, and intend to do in the present year. Having an understanding of the amount of potential risk you may face will also help you determine whether investing in a split liability plan is worth it.
Benefits of Split Limits of Liability
Carrying split limits would provide a higher aggregate limit or additional coverage in the event that multiple claims occur during the policy period.
With split limits it would be possible for the entire per claim limit to be paid out for one claim and still have an additional “bucket” of liability coverage available in the event that another claim arises during the policy period.
Split limit coverage would be more beneficial if multiple claims, at the per claim limit, occur during the year. Purchasing split limit coverage makes some firms feel more comfortable that they have the additional coverage in event that multiple claims occur during the policy period.
Disadvantages of Split Limits of Liability
While there are several pros to carrying split limit coverage you may be wondering, what are the cons of carrying split limits?
If only one claim occurs during the policy period, even if it erodes the entire per claim limit, you would still not use the additional coverage up to the aggregate limit. You could be purchasing excessive coverage if you do not use the remaining limit available up to the aggregate limit.
If additional coverage is what you are seeking, increasing single limit liability coverage could help you obtain more coverage.
Determining If Single Limit Coverage Is Enough
Single limit coverage would be sufficient in the event that only one claim occurs during the year. Single limit coverage can also provide sufficient coverage in which claim indemnity and defense expenses would be paid from the same per claim bucket.
The question is, how likely is it for a firm to have more than one claim per year? It is not as likely as you would think. However, multiple claims can occur during one year or policy period. If you feel that multiple situations could possibly arise, then split limit coverage would provide a higher aggregate, or overall limit, and could possibly provide more peace of mind.
Considering Split Limits of Liability Costs
Is a split limit of liability more expensive? It is more expensive than purchasing single limit coverage if the aggregate limit is higher. This is because the aggregate limit is providing more coverage in addition to the per-claim limit.
An aggregate limit provides additional coverage, or limits, for the policy period. Split limit coverage provides more potential coverage for the policy period than single limit coverage that is the same per-claim limit.
Single limit coverage is slightly less expensive. An extra outside limit for defense expenses can be purchased in addition to the single limits to provide an additional bucket to pay defense expenses in addition to the limit of liability. This coverage should be adequate if one claim is paid out and the claim amount falls within the per claim / aggregate limit of liability.
Finding the Right Coverage for You
There are pros and cons to carrying split limit liability coverage.
In general, this coverage would be more beneficial for firms with a potential for multiple claims during the policy period. This option could provide additional coverage for the year as well.
If multiple claims are not anticipated, single limit coverage may be best. It largely depends on the number of matters that you can foresee turning into potential claims during the policy period.
Certain areas of practice call for more risk exposure. Take this into account when considering potential claims. Given your own individual firm and clients, would you be more comfortable with split limit liability coverage or single limits liability coverage? Take some time to consider both options, and reach out to your insurance agent with any questions.