Diminishing Limits of Liability on Professional Liability for Architects/Engineers

What does this mean, diminishing limits?  This is also referred to ask shrinking limits.  If your firm has a claim the amount of the indemnity and expenses reduces the limits of liability for the policy period.

For example, your firm has limits of liability of $1,000,000 per claim and $1,000,000 aggregate.  If your firm has a claim that is settled for an indemnity of $400,000 and the claims expenses were $100,000 for a total incurred amount of $500,000.  This will reduce or diminish your firm’s aggregate limits of liability to $500,000 for the policy period.

As another example, if your firm has limits of liability of $1,000,000 per claim and $2,000,000 and the same claim amount as noted above, totaling $500,000 this will diminish your aggregate limits of liability to $1,500,000 for the policy period.

The diminishing limits of liability are important to be aware of for a few reasons.  If your firm has multiple claims in a policy period, the diminishing limits may have an effect on the limits of liability available for the claims.  Secondly, your firm’s contracts may require that your firm notify your client in the event the limits of liability are diminished.  Either way your firm should be aware of the limits of liability used and available on your Professional Liability policy period.

The claims representative from the insurance company may not know the exact amounts as the claim is in the discovery phase; however, they may know the estimated amounts as a claim proceeds.  It is best to stay in communication with your agent and the claims counsel during the claims process so that your firm is aware of the amounts on the claim.

It is important to understand that your limits of liability do reduce with claims in a policy period.  If you have questions about diminish limits of liability please call or email your Professional Underwriter agent.