One of the options you have when buying E&O insurance is Defense Outside the Limit (DOL) or Defense Within the Limit (DWL). It is important to understand this option clearly because this will impact coverage under your E&O policy significantly as well as the premium charged.
Defense Outside the Limit, which is sometimes referred to as Claims Expenses Outside the Limit provides substantially more protection than Defense Within the Limit which can also be referred to as Claims Expenses Inside the Limit. The difference is how the expenses incurred defending you or your agent against an E&O claim impacts your limit and what you have available to pay in damages, if any, when that claim is resolved.
Under either option, DOL or DWL, any costs incurred defending a covered claim will be paid by the E&O policy, after any deductible is paid, but with the DOL option the payment of these costs will not reduce the limit of liability that you have available to pay damages that may be awarded to the person making a claim against you. If you choose DWL any costs incurred will reduce the amount you have available under your policy to pay damages.
As an example consider a claim involving a buyer that claims an agent failed to disclose a leaky basement. The insurance company hires an attorney to defend the agent and between information discovery and depositions the attorney’s fees and costs amount to $100,000. It becomes apparent that the agent should have known and disclosed previous water infiltration problems with the house and the claimants are awarded $200,000.
Assuming the agent’s policy has a $250,000 limit, the E&O policy that is written with Defense Outside the Limit will pay $100,000 in attorney’s fees and $200,000 in damages. Under this same claim example if the agent had a DWL policy the $100,000 in attorney’s fees would be covered under the E&O policy but only $150,000 in damages would be covered. The difference is that with DOL the attorney’s fees are covered IN ADDITION TO the limit of liability available to pay damages.
It is also important to note that the aggregate limit of liability is the maximum amount available to pay damages for any one policy period. So, while unlikely, it is possible to have one or more claims during a policy period that exhausts your policy limit