Academic journal article Defense Counsel Journal

Legal and Ethical Considerations for "Defense within Limits" Policies

Academic journal article Defense Counsel Journal

Legal and Ethical Considerations for "Defense within Limits" Policies

Article excerpt

A "wasting" or "defense within limits" policy, known as a DWL policy, is one which includes all defense costs and litigation expenses within the applicable limits of liability. DWL policies have long been utilized for directors and officers and professional liability risks. Many of these policy forms are pure indemnity policies carrying no duty to defend on the part of the insurer, but only a duty to reimburse defense costs as part of the total limits of liability. Under an indemnity policy, the insured usually controls its own defense and selects its own counsel, and many DWL policies contain sizeable self-insured retentions.

In 1985, the Insurance Services Office introduced a commercial general liability policy form that included defense within limits provisions. Under that policy form, the insurer had the duty to defend and the corollary right to select defense counsel and control the defense. All costs of defense, however, were chargeable against the policy limits. There was no supplementary payments provision.

While there was a great deal of insurer support for the ISO policy form, brokers, agents, insurance buyers and regulators voiced strong opposition.(1) Such a policy form was prohibited or restricted in many jurisdictions. Ultimately, ISO withdrew the form, but many insurers continue to use manuscript general liability DWL policies for their larger commercial risks, and many non-admitted insurers utilize DWL policies with even smaller commercial entities.

DWL policies can present practical and ethical dilemmas for both plaintiffs' attorneys and defense counsel because every dollar spent on defense reduces the amount available to satisfy potential judgments. When the insurer attempts to control the defense under a DWL policy, defense counsel also can be placed in a conflict of interest position. On the plaintiff's side, the client's ultimate recovery and the attorney's own fee can be greatly affected by the pretrial handling of the case. The more extensive the pretrial discovery, the less insurance money available for judgment or settlement.

Insurers also can be placed in potential or real conflict situations under a DWL policy when they attempt to control the insured's defense. In fact, at least one commentator has opined that an insurer faces a greater risk of bad faith claims under a DWL policy, stating, "Instead of controlling the cost of defense, the DWL policy may place the insurer in a position of having no limit on its liability for the costs of defense and no limit on its liability for the claim."(2)

Insurance regulators responded to the proposed policy form by placing restrictions on DWL policies in many states. These regulations limit or, in some instances, prohibit the use of DWL policies.

For example, Minnesota by statute provides, "No insurer shall issue or renew a policy of liability insurance in this state that reduces the limits of liability stated in the policy by the costs of the legal defense," but then excepts "large commercial risks," defined as an insured with gross annual revenues of $10 million or more.(3) New York permits defense within limits for (1) a policy issued to a "large commercial insured" with net worth of $15 million, gross assets of $50 million and net worth of $3 million, or generating annual gross revenues over $50 million and a net worth of $3 million, or generating annual with limits of at least $5 million or with a deductible or self-insured retention of at least $100,000.(4)

At least one state--Arkansas--requires by statute a separate limit for defense costs, so that indemnity limits are not depleted. It forbids the approval of any policy in which defense expenditures deplete policy limits, unless a separate limit for defense costs equal to 100 percent of the annual aggregate limit of liability stated in the policy for judgments or settlements is offered for defense costs or claims expenses to the insured. …

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