Defense Costs Inside the Limit (Eroding Limits)

There are two ways a liability policy can handle the cost of defending you. Defense outside the limit means the insurer pays lawyers in addition to the limit, so a stated limit of $1M to $2M is that whole amount available to pay a claimant. Defense inside the limit, sometimes called an eroding, wasting, or self-consuming limit, means every dollar spent on defense comes out of that same $1M. Most general liability policies sold to ordinary businesses are written defense-outside. Most senior care professional liability is written defense-inside, because defense spend in this class is enormous relative to indemnity.

A senior care case that goes to trial can consume a large share of a modest limit before a verdict is ever returned, because these cases turn on chart review, staffing records, and competing expert testimony. That means an operator carrying an eroding limit of $1M to $2M against a claim that settles in the high six figures can find the limit already substantially spent. The operator then pays the balance out of operations, and the excess carrier, which was priced assuming a full underlying limit, may take the position that the underlying was not properly exhausted by indemnity. Ask one question at renewal: are defense costs inside or outside the limit. If nobody on the broker side can answer it immediately, that is itself the finding.

Defense outside the limit is available in the dedicated senior care markets, but it is priced, and in a hard market some markets will not offer it at all below a certain retention. Where it cannot be bought, the honest response is to buy more limit rather than to assume the stated limit is what will be there.