Andrew T. Cash, J.
Imagine this nightmare scenario: The boat you’re sailing on starts to sink and as it slips beneath the waves you frantically reach for a nearby life preserver. You make it off the boat but as you float in the water you realize your life preserver is starting to slowly dissolve from around your neck. You read a notice affixed to the preserver and it tells you that the jacket will keep you afloat for a while, but by choosing to use the preserver to save your life, you’ve also opted to have it slowly dissolve. As you sink into the water you curse your decision to buy this life jacket and make a mental note not to shop at that boating supply store anymore … if you survive.
Unfortunately, for an ever-increasing number of South Carolina insureds, a similar and equally frightening scenario is playing out with increasing frequency. It comes in the form of the “Eroding Limits Policy,” also known as a “Wasting Limit,” “Wasting,” “Cannibalizing,” “Defense within Limits” or “Diminishing Limits” policy. These policies are not wholly novel, but they are finding a new and growing popularity with insurance companies looking to minimize risk and cost by passing it along to the insured. The result is an insurance policy causing problems for plaintiffs’ attorneys, defense counsel and, of course, insureds.
Into thin air
The eroding limits policy is as equally simple as it is insidious. A buyer purchases an insurance policy to protect against a risk. The policy provides that should the insured ever need to use the protections of the policy, then any costs of defending the insured will come from the available policy limits. Essentially, the costs of defense will be considered part of the loss. Most notably, that includes the cost of attorney’s fees associated with the defense of the insured. Since defense of the insured is required in the very nature of an insurance policy,1the insured cannot avoid at least some of this cost if counsel is obtained.
As an example, say an insured has a $100K policy. There is a loss triggering the need for the policy. An attorney is hired by the insurance company to defend the insured and the insurer, and the attorney runs up a $40K bill for attorney’s fees in the insured’s defense. At the time of the resolution of the matter, the insured now only has $60K of coverage remaining to protect them. By electing to use the insurance the policyholder purchased, and through such, having a defense to the claim against them, they have literally reduced the amount of coverage available to protect them.
The reasoning behind this policy and its increasing popularity is simple: insurance companies are looking to pass huge and ever increasing costs of legal defense along to the consumer. Let’s face it: lawyers are expensive. (But worth every penny, amiright?!) In the past and with traditional insurance policies, the costs of defending the insured have fallen on the insurer. If the case spans years of litigation, then an insurance company could be faced with adding hundreds of thousands of dollars in defense and trial costs on top of the actual policy limits they may be paying out. To combat this, policies like eroding limits policies were developed to transfer the costs of defense from the insurance company onto the consumer. What has resulted has been a significant reduction to the insurance companies’ overhead, March 2018 39 but tricky legal and ethical considerations for everyone involved.
Gone in 60 seconds
The implementation of eroding limits policies has created trouble all around, even for the insurance companies who have conceived them. First, consider the plaintiff’s attorney. All attorneys have a duty to zealously represent their clients. Exactly what is a plaintiff’s attorney to do when faced with an eroding policy covering a defendant, however? If an attorney learns that the pool of funds available for his or her client to recover are literally dwindling by the hour, then having any serious, lengthy back-and-forth about settlement numbers could be instantaneously harmful to the plaintiff’s recovery. If a plaintiff’s attorney feels a settlement offer value is below the mark and denies, or advises denial of the offer, then when further negotiations or litigation take place, there may be less funds available for the plaintiff to recover than the original unacceptable offer. If the insured does not have other avenues of funds available to cover the plaintiff’s loss, then any significant fght over settlement, let alone litigation, could leave the plaintiff with nothing to recover. The result is a plaintiff’s attorney backed into a corner of having to settle as quickly as possible, perhaps for a less than ideal amount. How can a plaintiff’s attorney zealously prosecute his or her claim and explore every viable option, including litigation, while knowing that doing so is harming the plaintiff’s potential...