If you've never faced a messy malpractice lawsuit, it may be all too easy to assume your professional liability insurance will automatically take care of all the costs you would face. Unfortunately, the answer isn't that simple. Defense costs add up quickly and can erode a large portion of the funds intended to pay off a legal settlement. If you don't know the details of how your policy handles claims expenses, you could end up paying significant costs out of pocket in the event of a lawsuit.
Claims expenses are the legal costs that add up during your trial. As a lawyer, you likely understand how quickly these costs add up. While you may think you have a comfortable margin within your professional liability policy to take care of the monetary obligations if a settlement arises, it's easy to overlook some of the fees involved in any legal process. Once your insurer's obligations listed in your policy limit are met, you may have to pay any unpaid expenses.
To understand claims expenses outside the limit (CEOL), you first need to understand claims expenses inside the limit (CEIL). If your claims expenses are inside the limits of liability, costs for court, report filing, investigation, and lawyers will be paid directly from your policy limit. This may also be referred to as an eroding limits policy, and it is usually the minimum requirement for law firms. While you might assume this is what the policy is for, it's vital to consider the amount of funds involved. If you have a $500,000 policy and your legal fees cost $250,000, you will only have the remaining $250,000 to go toward any monetary damages you owe the client. This can be especially damaging if more than one claim is made against you during your policy period.
Claims expenses outside the limit (CEOL), sometimes called defense outside the limit, can be defined as money set aside to pay defense fees accrued defending your claim. Essentially, the insurance policy splits the funds available into two categories. The primary limit of liability is the amount the policy pays directly to settle monetary obligations, and the CEOL limit is designated for legal costs alone. The reason for this is simple. Without CEOL, defense costs could exhaust your policy limit, leaving you to pay a portion, or even the entire settlement agreement, out-of-pocket. While CEOL will raise your monthly premiums, it's generally recommended to strengthen your liability coverage.
Insurers offer a few different options when it comes to CEOL. Deciding which option is right for you shouldn't necessarily come down to counting the cost of your premium. Some considerations include the size of your firm, personal assets that need protection, and the typical size of client settlements. There are two main types of CEOL limits generally available in professional liability insurance policies.
- Unlimited CEOL - When the policy includes the mention of CEOL, but doesn't define a limit within the policy, the amount is considered unlimited.
- Capped CEOL - Sometimes, the CEOL is limited to match the amount of the primary limit. Another capped option occurs when the CEOL is a percentage of the primary limit.
How To Make an Informed CEOL Choice
While some CEOL options look good on paper, they might not be the best final option. You've likely heard the phrase "If it sounds too good to be true, it probably is." That sentiment is likely to be even more factual where large sums of money are involved. It's important to remember that a substantial CEOL limit isn't a substitute for an insufficient primary liability limit.
Additionally, it isn't really feasible to pay more for a policy containing CEOL if a CEIL policy with a lower premium will cover your needs. An experienced insurance specialist can help you make an informed decision about whether a CEOL policy is a practical option for your small firm.
How CEOL Works
CEOL was designed to be a protection feature, not a legal loophole. In short, your CEOL limit isn't designed to pay for everything. A CEOL pays for claims expenses up to the limit designated in the policy. Once the CEOL limit is reached, the primary limit will take over and pay the remaining defense costs and monetary obligations. When the primary limit is exhausted, you will be responsible for the remaining costs.
When considering your CEOL options, it's vital to remember the purpose of the primary limit. Even if your policy contains uncapped CEOL, a low primary liability limit puts you at risk. Once the primary limit is exhausted, the insurer's obligation is complete, leaving you to pay all monetary obligations outside of defense costs.
CEOL is undoubtedly an important part of professional liability insurance, but it is not designed to make up for poor coverage. With the right policy, CEOL can help small firms avoid the need to purchase a higher primary limit policy with larger premiums. However, it's not an emergency catch-all. 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 malpractice suit. Understanding the terms of your primary limit and your chosen CEOL is vital to avoid facing nasty financial surprises in the courtroom.
Grasping a better understanding of CEOL can be the barrier between you and a financial disaster. At Protexure Insurance Agency, our team of insurance specialists has the experience to assist you with any concerns regarding CEOL. We understand that the needs facing small or single attorney firms aren't the same as large firms. That's why we specialize in those needs and eliminate the premium hikes due to the risks only faced by large firms found at many other companies. Our coverage is tailored to the size of your firm with specialists available to answer your questions every step of the way. If you have questions or concerns about your CEOL coverage, contact us today. Hindsight might be 20/20, but being armed with the right knowledge to protect your assets is the most important tool in any size law firm.