Defense Costs Inside or Outside the Limits of Liability?

Averting financial disaster

Purchasers of a surplus lines Product Liability Insurance policy are often presented with quotes indicating defense costs inside the limits of liability. If you read your proposal or quote carefully, you will often see the option of adding these for an additional 10% premium charge.

Why is this significant? Before answering that, I want to explain what it means to have defense costs inside or outside the limits of liability.

If your defense costs are inside the limits of liability, all legal, investigative, defense and appeal expenses erode your limits of liability. Say all these expenses add up to $500,000 and you have a $1 million per-occurrence limit on your policy. You are left with only $500,000 left to pay a judgment or settlement.

However, your liability limits won’t be reduced if your defense costs are outside your limits of liability.

When thriftiness may not pay off

This may not appear to be a big deal on the surface. But if you manufacture a defective batch of products, you may find yourself faced with multiple claims.

Recent data indicates the average cost to defend a Product Liability claim is $876,000.  A $1 million per-occurrence with a $2 million aggregate liability limit could be exhausted very quickly. That means no limits left to pay the judgment or settlement of any additional claims. Your exhausted liability limits release your insurance carrier from its obligated to pay any claim, judgment or claim expense, or defend your company.

The bottom line

Review your Product Liability policy carefully at when it’s time to renew. If defense costs are within the limits of liability, consider carefully spending that additional 10%.  Doing so might be the difference between the success and failure of your business.