Know Your Policy – Defense Within Limits and Bad Faith Actions

By Clint Scott | May 19, 2016

Know Your Policy – Defense Within Limits and Bad Faith ActionsIn many professional and commercial liability policies is a provision called “defense within limits.” In a nutshell, a DWL provision means that the amount of your policy that can be paid out in a claim must include legal defense costs. As a policyholder, this puts you in a unique predicament: if you are being sued, do you spend the extra money and hope you win, or do you try to settle as quickly as possible because you know exactly how much money your policy offers?

Because these types of policies are often less expensive than more inclusive policies, they are a popular choice for small businesses and start-ups, where the initial capital amount might be small. They also give policyholders a small amount of control over how their sides are presented, because they are entitled to their own independent counsel.

Another potential problem comes in the guise of bad faith in terms of defense costs – namely, how do you know if your insurer is really doing their best for you and your business? For example:

  1. Did the defense need to cost that much? Let us say your policy has a limit of $1 million, and your carrier spends half of that defending you. That leaves you with $500,000 in your policy to pay out a settlement. If your insurance company overspent, failed to manage its finances or opted for more expensive strategies, you can make an argument that it acted in bad faith.
  2. Were you kept in the loop about expenses? Just like in general liability policies, your insurer must be upfront about where things stand. Failing to communicate exactly how much money has been spent, or what the expected “burn rate” is, leaves you unable to make decisions about whether or not to offer a settlement. This could also be construed as an act of bad faith.
  3. Did they even discuss a settlement? Your insurer knows how much your policy is worth. If a settlement offer was never on the table when it really should have been, because your insurer failed to discuss that option, the company may be found to have acted in bad faith.

We know that this particular provision may not affect all of our clients in Tennessee, but it should serve as a warning to anyone with any kind of insurance policy. If you are a victim of bad faith, an experienced Tennessee insurance disputes attorney can help. McWherter Scott & Bobbitt has provides compressive representation on behalf of insureds throughout the state. Please contact attorneys Brandon McWherter or Clint Scott to find out more. The firm maintains offices in Nashville, Chattanooga, Memphis and Jackson for your convenience.

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Posted in Insurance Disputes