Wasting Coverage: The Fight Over "Defense Within Limits"
In recent years, insurers have increasingly adopted so-called “wasting limits” provisions within general liability policies. Such provisions, which cause the overall limits of coverage to be reduced by incurred defense costs, are particularly prevalent in add on coverages where insurers seek through endorsements to limit the scope of their obligations with respect to claim types, such as abuse, assault and battery, liquor liability and the like, that would otherwise be excluded altogether. The efficacy of such defense within limits (DWL) provisions has been called into question by a recent opinion of a federal district court in NIC Ins. Co. v. PJP Consulting, LLC, No. 09-0877 (E.D. Pa. October 22, 2010).
NIC’s insured, Cavanaugh’s River Deck, was sued by a bar patron for failing to prevent an assault in which four other patrons had savagely assaulted him. NIC defended under a reservation of rights, seeking a declaration that its coverage obligations to the bar were capped at the $50,000 sub-limit set forth in its Assault and Battery Limits of Liability Endorsement and that its defense obligation would cease once defense costs exceeded that amount.
These kind of “wasting limits” provisions have become increasingly common in recent years and, by and large, have been held to unambiguously terminate an insurer’s contractual duties once defense costs exceed the sub-limit. In National Union Fire Ins. Co. of Pittsburgh, PA v. West Lake Academy, 48 F.3d 8 (1st Cir. 2008), for instance, the U.S. Court of Appeals for the First Circuit held that an emotionally-troubled teenager who became pregnant as the result of having sex with the insured’s employee was not entitled to any recovery since the policy’s $100,000 sub-limit for sexual abuse claims had been wholly depleted by the insured’s costs of defense. The First Circuit rejected the claimant’s argument that the “wasting” language was ambiguous or that attorney’s fees were not included within the “expenses” language in the sexual abuse endorsement.
Nevertheless, Judge Surrick declined to jurisdiction over NIC’s DJ, declaring that, as the issue of whether burning limits policies are against public policy is an unsettled issue of state law in Pennsylvania, the case would be better addressed in a pending state court action. The District Court took note of the fact that “defense within limits” provisions had been barred or limited by regulators and legislators in various other states and found that such provisions create potential bad faith and ethical issues for insurers and defense counsel as they put the insured in the position of swiftly losing its available coverage through aggressive defense activity if a case cannot be settled early on.
In fact, there are a surprising number of jurisdictions in which defense within limits wordings have been ruled to be unenforceable or void as against public policy.
Defense within limits provisions are barred in Minnesota with the exception of professional liability policies in excess of $100,000, large commercial risks and environmental impairment liability insurance. Minnesota Statute, Section 60A.08 subdivision 13.
Or. Rev. Stat. § 742.063(1) provides that liability insurance containing defense within limits provisions must be filed and approved by the Director of the Department of Consumer and Business Services.
New York Insurance Department regulations permit defense within limits provisions only in certain circumstances and the amount of expenses that can reduce the policy limits is capped at 50% of the policy limits unless the insured is given full control of its defense. N.Y. Comp. Codes Rules and Regulations Title XI, § 71.3.
The lesson: don’t count on what’s in your policy just because it’s in your policy. Even wordings that are plain and unambiguous may prove problematic if they stretch too far and are perceived by courts as interfering with the processes of justice.
