A wasting insurance policy, also known as an eroding limits or defense-within-limits policy, is a type of liability insurance where the insurance company agrees to pay the amount their insured is determined legally liable for up to the policy limits however, those policy limits are reduced for legal expenses and attorney’s fees incurred defending the claim.
What Makes a Policy an Eroding Limits Policy?
Eroding limits policies are liability insurance policies that contain language that reduces the total coverage by legal expenses and attorney’s fees. They have language such as the following:
“The Limits of Coverage indicated in this policy shall be reduced by any payments made by the insurer in the defense of any claim or lawsuit against the insured. Such reductions may exhaust the policy limits.”
The contract language does not have to follow any specific pattern.
How Do Eroding Limits Policies Differ From Other Liability Policies?
A typical liability insurance policy has set “Limits of Coverage” that determine the maximum the company will pay to another party to settle a claim or lawsuit against their insured. The Limits of Coverage apply only to money paid directly to settle a claim or pay a judgment. The insurer’s expenses are the insurance company’s own obligation to pay. Eroding policies incorporate all costs and expenses of the insurer into the Limits of Coverage thereby reducing the amount that may be paid to settle the claim or lawsuit itself.
Who Carries Wasting Limits Policies?
Wasting limits policies are most often found in commercial general liability policies in industries where there is no minimum amount of coverage required by law. Industries like interstate trucking are required to insure vehicles over 10,001 lbs. with a minimum of $750,000.00 in coverage to pay a judgment specifically. Thus interstate carriers violate federal law if they carry a policy that wastes below the required minimum. Other unregulated industries, however, may carry one of these policies because they were quoted a cheaper rate and did not understand the difference. These may include incidents such as:
What Should You Know About an Insurance Policy with Eroding Limits?
Insurance policies with eroding limits result in the amount of money available to settle a serious injury claim decreasing the longer a claim is disputed. When the party has suffered serious injuries, these policies are bad for both the insured and the claimant. The insured’s protection wastes away as the insurance company fights the claim. If it becomes very low or completely wastes away, then suddenly there is not enough money to settle the case and the insured is not protected from losing their own assets to a judgment collection proceeding.
Likewise, these policies are bad for the claimant because the more they pursue the claim, the less insurance there is available to settle it. But in addition to this, these policies make it difficult to put pressure on an insurer with a Stowers demand, To trigger the Stowers duty to act reasonably in evaluating a settlement offer, the plaintiff’s attorney must demand a sum certain that is within the policy limits. However, the policy limit is forever changing. It is for this reason, in Golden Bear Insurance v 34th S&S, LLC, d/b/d Concrete Cowboy, the U.S. District Court for the Southern District of Texas held that a mere demand for “policy limits” does not trigger the Stowers duty on an eroding insurance policy.
Final Thoughts on Wasting Insurance Policies
Wasting insurance limit policies are bad for the insured and the claimant. The only party they benefit are the insurance company. For this reason, some States and industries regulate these types of policies and/or disallow them. If you suspect one is involved, you should discuss the matter with your personal injury attorney and carefully consider how to maximize your recovery by timing the Stowers demand when there are sufficient limits still available.
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