Article 2 of 4: How Claims-Made Triggers & Defense Limits Work
Commercial insurance policies are built on specific legal mechanisms. While standard property or auto policies operate on an “Occurrence” basis, Professional Liability (Errors & Omissions) policies usually rely on a Claims-Made structure. Understanding how this structure works—and how legal defense costs are handled—is critical to evaluating your true coverage.
1. The Claims-Made and Reported Trigger
Under a Claims-Made policy, two distinct conditions must be met for coverage to respond:
- The alleged error or omission must have occurred on or after your policy’s Retroactive Date.
- The claim must be first made against you and reported in writing to the insurer during the active policy term (or during an authorized Extended Reporting Period).
If a client sues you today for work completed two years ago, coverage applies only if you maintained continuous claims-made coverage with a retroactive date that predates the work.
2. Defense Within Limits (“Shrinking Limits”)
Many policyholders assume their limit of liability is reserved entirely to pay settlements or court judgments. However, many E&O policies feature Defense Within Limits.
Under this clause, every dollar spent on legal defense, expert witnesses, court filings, and attorney fees is subtracted directly from your total Limit of Liability.
A worked example. On a standard policy with a $500,000 total limit, if $150,000 is spent on legal defense, only $350,000 remains available for a settlement or judgment. The defense costs came straight out of your protection.
Key Takeaway
If your policy includes defense within limits, attorney fees directly erode your protection. Work with your agent to select limits that account for both potential defense costs and liability awards.
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