Some commercial insurance policies are written so that defense costs come out of coverage limits. It’s called declining limits (or wasting asset) because as the case is proceeding the coverage limits are declining. So the amount of liability coverage decreases, dollar for dollar, with every billable hour or cost in the case.
For defendants, this is a real issue. The policy limits that protect them against a judgment are being whittled away by the very people that stand between them and a verdict that starts digging in their pockets. In really large cases, this does not have a huge impact. But with smaller policies, a declining limits policy can be a real game changer.
My Declining Limits Case
My first case like this was a boiler accident where I sued the designer of the boiler. The company didn’t really have two nickels to rub together so while we might have hit them with a bad faith verdict if they offered the policy limits there was not much we could do. This policy had another goofy clause. They could get out of a $15,000 deductible if the case settled in mediation. Their lawyer asked me for mediation. I said no, just offer the policy. He told me of the language and we agreed to the mediation. They tried to get me to bend when I got to the mediation. I didn’t, they put up the money, and was that. But if I had known about the declining policy limits… I have no idea what I would have done… I guess push for settlement harder earlier. Ultimately, the difference would have been very little. It was pretty fun to see all the defense lawyer’s bills, which we
rarely never have the opportunity to see.
It is hard, under these circumstances, to even make a demand beyond “give me all of your money.” There is not an accountant that gives an updated total on a daily basis. So it is impossible for plaintiffs to make a demand that they know to be within policy limits, which is critical for a bad faith claim after an excessive verdict.
Policies like this make me glad I’m not an insurance defense lawyer. The conflict issues this kind of policy creates are through the roof. The insurance company may want to go all out to protect against a policy hit. But maybe the insured just wants that policy offered early and wants the lawyer to do less to make sure there is enough to satisfy a judgment.
New Louisiana Law
The Louisiana House of Representatives last week voted to stop insurance companies from using declining limit policies that allow defense costs to suck away the liability policy limits. The bill passed 90-1 and now moves over to the state Senate. It is not a perfect law – it has a goofy provision that lets the insurance commissioner waive the requirements of the law. It is apparently not a meaningless one, either. The insurance company lobbyists are pushing to make sure that in-house counsel costs can count as defense costs in the event the commissioner waives the law. I’m a little amazed that state legislatures would vote to make a law that the executive branch can ignore at will.
I hate declining limits policies. I really do. Do I support the Louisiana law? Meh. I don’t know. It is good for everyone but the insurance companies, so that would normally put me solidly behind it. But I’m also a big believer in freedom of contracts. If the insurance company can find a sucker, I have no problem with that as long as that sucker is a commercial sucker as opposed to Joe Six Pack.