Frying Pan or Fire? Policyholders Beware the Strange Incentives in “Burning Limits” Liability Insurance Policies

Defense Counsel Represents the Client as a Whole

Similarly, defense counsel faces an additional concern when defending clients under a burning limits insurance policy. Such a limitation on the expenditure of defense costs puts a premium on ensuring that defense counsel represents the interests of the policyholder. For example, early budgeting and early case assessment is at a premium in a situation where every dollar of defense expense reduces available limits for the payment of a judgment or a settlement. Furthermore, defense counsel should exercise care in responding to inquiries regarding the amount of available liability insurance. Since limits are further depleted with the passage of each month, such information should be considered carefully when responding to inquiries regarding available limits of insurance.

Furthermore, a burning limits insurance policy presents at least the possibility that defense counsel, engaged to represent a policyholder, might be required to continue a defense after the exhaustion of liability insurance limits. In most states, when an attorney seeks to terminate the representation of a client in litigation, that attorney may only do so after taking reasonable steps to avoid foreseeable prejudice to the client. Further, an attorney, after having appeared for a client in court, may only withdraw from such representation in compliance with the applicable rules of such court. These ethical obligations apply regardless of who was paying for defense counsel’s services prior to such termination. New York Rules of Professional Conduct Rule 1.16: “Declining or Terminating Representation”; Matter of Kuzmin, 98 A.D.3d 266, 949 N.Y.S.2d 47, 2012 N.Y. App. Div. LEXIS 5631, 2012 NY Slip Op 5708, 2012 WL 3000462 (N.Y. App. Div. 1st Dep’t 2012) (lawyer repeatedly failed to formally withdraw from cases as required).

Lower the Heat!

Burning limits insurance policies often provide less protection to policyholders. Even insurance regulators and courts have recognized that the more traditional non-wasting, non-burning limits policies usually provide better protection, and that deviation from such coverage may offend insurance regulations or public policy. Plaintiff’s counsel need to be aware of their role in reducing the potential limits available to pay a judgment, and defense counsel must be aware of how burning limits liability insurance policy may impact their ability to protect their client. Armed with an understanding of these dynamics, a policyholder can navigate the strange incentives in burning limits insurance policies.

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