The Complications of Sub-limits in High Exposure Cases


By: Phil Savrin

Insurance coverage is essentially the transfer of risks to insurers who have pooled assets through payment of premium to cover liabilities that may arise to the insureds. As the exposures rise in value, the cost of coverage rises to meet the demands of the insurance industry.  Over the years, certain exposures have become increasingly difficult to cover, such as liabilities arising from asbestos, artificial stucco, and so-called junk faxes under the Telephone Consumer Practices Act of 1991. A single lawsuit involving these types of claims can easily exhaust the policy limit in addition to incurring significant costs of the defense.
To remain competitive while also keeping premiums affordable, some insurers offer to cover these types of claims but with a cap on the exposure through a sub-limit.  So, for example, a CGL policy that covers a bodily injury exposure up to $1,000,000 “per occurrence” might provide a reduced limit of $50,000 for a particular exposure such as a claim that involves sexual molestation or abuse. To further control the exposure, the sub-limit often includes defense costs, which could wholly eliminate the sub-limit in a case of significance.
Having a sub-limit can give the insurer an “edge” in resolving high-exposure claims where the proceeds of the policy is essentially the only recoverable asset of the insured. Even where the insured is financially solvent, a sub-limit can protect the insurer from paying more than the amount that went into the calculation of the premium. On the other hand, a sub-limit can create complications when the claimant is unwilling to accept the lower amount of coverage, or when the claimant (and/or the insured) contends that the claim does not fall entirely within the endorsement containing the sub-limit.  Once the defense costs consume the amount, the insurers may then need to determine whether to withdraw from the defense based on the exhaustion of the applicable limit or to continue to defend and consider bringing a declaratory judgment action.
This scenario can present a dilemma for the insurer; withdrawing from the defense could result in an extra-contractual claim, while continuing to defend adds unintended costs especially if a coverage action ensues. These costs may be warranted in light of the exposure presented yet incurring them over and above the sub-limit cuts against the reason for having the sub-limit in the first place.  Similarly, claimants and insureds may incur additional legal costs in litigating the applicability of the sub-limit and add uncertainty to the resolution of the claim.
In sum, although sub-limits help contain costs in high-exposure cases, careful consideration must be given to their enforcement which can present special challenges to claimants, insurers, and insureds alike.
If you have any questions or would like more information, please contact Phil Savrin at [email protected].