Connecticut Regulates ‘Defense Within Limits’ Provisions by Insurers

Connecticut’s insurance regulator has provided commercial insurers with updated guidance on “defense within limits” policy provisions including the lines of insurance on which they may be included and the consumer disclosure required.

The guidance from the Connecticut Insurance Department (CID) notes that “defense within limits” (DWL) provisions generally provide that legal defense costs incurred by an insurer in defending an insured against a claim will be set off against the policy’s liability coverage limit. These provisions are traditionally offered in connection with claims-made policies and help reduce premium costs to insureds.

However, the CID said it has some concern about an insured’s potential exposure in the event defense costs erode the liability coverage limit. If this happens, an insured may be left with “nothing in the policy to reimburse the claimant for damages should they ultimately prevail on a liability claim,” the guidance notes, and the insured “would be legally responsible for remaining damages not paid under the policy.”

With this concern in mind, the CID said it is limiting DWL offerings to claims-made liability policies only and in the following commercial lines policies: Directors & Officers, Errors & Omission, Cyber liability and Employment Practices and Professional Liability.

With this updated guidance, the CID has also added Fiduciary and Cyber Liability to the other lines that may contain DWL provisions.

A spokesperson for the CID told Insurance Journal that the new guidance is not in response to any incident in particular; it is meant to ensure that insurers know the expectations around DWL provisions.

“While we have no record of any concerns being raised, we do want to ensure companies know the expectations when Defense Within Limits (DWL) are used in a policy,” Jim Carson said. “We wanted to proactively provide clarification that we would allow it, but on all policies with DWL companies, companies will need to offer options to purchase more coverage, and there needs to be clear disclosure.”

The CID notice said insurers need to ensure that policyholders are “adequately informed” of how DWL policies operate. It is requesting that insurers provide “conspicuous disclosures in policy applications and policy declaration pages informing the insured of how DWL provisions operate to reduce the liability coverage limit.”

The department is also asking carriers to inform insureds of any option to purchase additional defense cost coverage or “defense outside of limits” policies.