Many people don’t know that there are so-called “burning” insurance policies or “burning limits” or “defense within limits” policies. What this means is that the cost of defense (including hourly fees for attorneys to defend the lawsuit, expert consultants and witnesses, and all other costs of defending a claim) reduce the total limit of coverage. For example, if you have a policy with a $100,000 limit that is “burning”, every dollar spent defending the claim would reduce this amount. So, if lawyers charging $250 per hour, worked 10 hours on the case, the limit would now be $97,500 available to pay any settlement or judgment on the claim.
Common language to look for to know if your insurance policy has “burning limits”
While courts in different states have interpreted and either upheld or denied an insurance company’s attempt to make the defense costs part of the total limits of coverage, there are some common phrases that have been upheld as valid in many cases. These include the following:
- “Loss” being defined as “damages, settlements judgments and defense expenses“
- Loss includes “damages, judgments, settlements and costs, charges and expenses incurred in the defense of actions, suits or proceedings and appeals therefrom.” Continental Insurance Company v. Superior Court (Baumgartner) (1995) 37 Cal.App.4th 69.
- “When payment not exceeding the Limit of Liability has to be made to dispose of a claim, costs, charges, expenses and settlements shall be payable up to the Limit of Liability” Helfand v. National Union Fire Ins. Co. of Pittsburgh P.A. (1993) 10 Cal.App.4th 869
Precautions to be taken by a Defendant with a “burning policy”
First of all, these types of policies should be avoided, if possible. They are somewhat common in commercial or business liability policies and Employment Practices Liability Insurance (for insuring against things like wrongful termination of employment claims). Business owners should be aware that these policies exist and try to negotiate a policy where the defense costs are not included in the total liability limit, if possible. If that is all that is offered or if the “non-burning” policy premiums are too expensive, it is best to immediately discuss this issue with your defense counsel upon the filing of any claim against you. The strategy is usually to attempt an early mediation or other type of alternative dispute resolution of the claim with a minimal amount of defense costs so that you don’t wind up having to come “out of pocket” to settle the claim or pay any judgments. Obviously, the legitimacy of the claim must still be analyzed but, unless your legal counsel is fairly certain that the case can be disposed of with not much being spent in defense costs (usually a rare case), it may be best to talk settlement sooner rather than later.
For Plaintiffs and Their Lawyers, You Don’t Want to Be A “Bull in a China Shop” With A Burning Policy!
Every lawyer representing a plaintiff in a claim for damages should, as soon as possible, establish the total limits of insurance coverage for all defendants and whether any policy covering the claim has these types of “defense within limits” clauses. As I have pointed out many times in other blog posts, a claim is only worth what can be used to pay the settlement or judgment, which, most often comes from insurance proceeds. It behooves that plaintiff claiming damages and their lawyer to not take a “scorched earth” approach on burning limits cases. This simply reduces the total amount of money in the pocket from which you are collecting. This leads to the same direction as discussed above, namely, talking settlement of the claim as soon as possible.
Author Bio: Steven M. Sweat, is a partner with Glotzer & Sweat, LLP, a Los Angeles based personal injury and civil litigation law firm .