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📉 '''Eroding limits''' — sometimes called "wasting limits" or "burning limits" — describe an [[Definition:Insurance policy | insurance policy]] structure in which [[Definition:Defense costs | defense costs]], legal fees, and other [[Definition:Allocated loss adjustment expense (ALAE) | allocated loss adjustment expenses]] reduce the total [[Definition:Coverage limit | limit of liability]] available to pay settlements or judgments. This structure is most commonly found in [[Definition:Professional liability insurance | professional liability]], [[Definition:Directors and officers insurance (D&O) | directors and officers]], [[Definition:Errors and omissions insurance (E&O) | errors and omissions]], and [[Definition:Cyber insurance | cyber]] policies, where litigation defense can be prolonged and extraordinarily expensive. Unlike [[Definition:Commercial general liability (CGL) | CGL]] policies, which typically provide defense "outside the limits," eroding-limits policies effectively force the insured and the insurer to share a single pool of money for both defense and indemnity.

⚙️ Consider a [[Definition:Directors and officers insurance (D&O) | D&O]] policy with a $10 million [[Definition:Aggregate limit | aggregate limit]] and eroding-limits language. If the insured incurs $4 million in legal defense costs during a protracted securities class action, only $6 million remains to fund any settlement or award. Each invoice from defense counsel literally chips away at the total protection. [[Definition:Underwriting | Underwriters]] factor this dynamic into pricing by modeling expected defense-cost ratios, severity trends, and litigation duration for the specific [[Definition:Line of business | line of business]]. Sophisticated [[Definition:Insurance buyer | insurance buyers]] often purchase [[Definition:Excess liability insurance | excess layers]] or dedicated [[Definition:Side A coverage | Side A]] towers to ensure adequate limits survive after defense spending.

🔑 The practical consequence of eroding limits is that a policyholder can find itself with depleted coverage precisely when it needs protection most — at the settlement table or in front of a jury. [[Definition:Insurance broker | Brokers]] and [[Definition:Risk manager | risk managers]] must model worst-case defense-cost scenarios during the [[Definition:Policy placement | placement]] process to right-size the program. Awareness of this structure also shapes litigation strategy: insureds may push for early mediation or settlement to conserve limits, while plaintiff attorneys may intentionally prolong proceedings to pressure a settlement as remaining coverage dwindles.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Defense costs]]
* [[Definition:Aggregate limit]]
* [[Definition:Directors and officers insurance (D&O)]]
* [[Definition:Professional liability insurance]]
* [[Definition:Excess liability insurance]]
* [[Definition:Allocated loss adjustment expense (ALAE)]]
{{Div col end}}

Definition:Eroding limits - Revision history

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