Recently signed amendments to Louisiana law will reduce and eliminate certain restrictions on liability policies whose limits are eroded by the insurer’s payment of defense costs.
Louisiana Law No. 675 JBE 2022 changes Louisiana’s regulations on the issuance of erosion limit liability policies, under which policy limits are reduced by defense expenses. SR 22:1272 was enacted in 2021 to regulate the issuance of erosion limit liability policies. It prohibited defense spending from eroding the limits of liability policies issued by “registered” insurers, but with numerous exceptions, including the possibility of a waiver of the prohibition by the Commissioner of Insurance in certain circumstances.
Under the original legislation, the prohibition applied without exception to four types of insurance: personal lines, medical liability, commercial vehicles and commercial general liability. He excepted nine types of insurance from the ban:
- Any professional liability other than malpractice
- Liability of Directors and Officers
- Liability for Errors and Omissions
- Pollution Liability
- Employment practices
- Responsibility for cyber risks
- Responsibility for Information Security and Privacy
- Defense of patents or other liability for intellectual property infringement
- Commercial general liability insurance “sold in combination”
For any other type of insurance, the Commissioner was authorized to lift the ban after the Commissioner’s review of the level of competition in the market, the nature and design of the product, the availability of insurance cover and “other relevant factors”. The original legislation prohibited certain expenses from eroding policy limits, including overhead expenses, claims expenses “or other expenses incurred by the insurer in the ordinary course of its business”. It also prohibited defense expenditures from exhausting the full amount of the policy limits and authorized the commissioner to limit or set the amount of expenditures that reduce the policy limits.
The amended legislation maintains a general prohibition of defense cost erosion policy limits, but with expanded exceptions and less power for the commissioner to restrict defense cost erosion limits. The amendments allow the Commissioner to waive the limit erosion ban on commercial vehicles and commercial general liability policies, leaving personal lines and medical malpractice coverage as the only liability insurance that does not have right to waiver under any circumstances.
The optional waiver provision now requires the commissioner to take into account the customs of the industry and the interests of the particular insured. If the limit erosion prohibition is waived, the insurer is no longer prohibited from exhausting the limits of the policy by paying defense costs, and the commissioner is no longer authorized to set or set the amount of expenses that reduce policy limits. SR 22:1272 still applies only to “approved” insurers, not to non-admitted or excess line carriers.
The law, as amended, still limits defense costs used to reduce liability limits to “reasonable attorneys’ fees and expenses directly related to the insurer’s defense of a specific liability action on behalf of a insured and all other litigation costs arising directly from the defense of a specific liability action. It still prohibits an insurer from reducing policy limits with overhead, unallocated loss adjustment expenses and other unallocated expenses incurred by the insurer in the normal course of business. It also repeats the requirement of the original legislation that a Limit Erosion Policy (subject to certain exceptions) must include a separate notice or inclusion on the Statements page indicating that defense expenditures are eroding limits. politics.