Beware of Sublimits!
Sublimits are one of the most common sources of consternation for our business clients. A “sublimit” is a lesser insurance limit of liability that applies to a specific type of loss and is included within the larger, generally applicable, limit. Here are some common examples:
- a fiduciary liability policy may have a $10,000,000 limit, but the sublimit for IRS remedial programs may be $100,000;
- a property insurance policy may have a $20,000,000 general limit, but the sublimit for earthquake or flood may be $1,000,000;
- a cyber policy may have a $5,000,000 general limit, but the sublimit for certain breach-related expenses (e.g., breach notification, credit monitoring, expert forensics to determine scope and cause, and legal compliance) may be $500,000;
- a commercial general liability (CGL) policy may have a $2,000,000 limit, but the sublimit for sexual abuse/molestation and/or assault & battery may be $50,000 (and the $50,000 may be eroded by defense costs in addition to settlements or judgments).
Excess or umbrella policy coverage limits may or may not apply to sublimited coverages, depending on policy language.
Some types of sublimits are less problematic than others. For example, a sublimit for IRS remedial program coverage under a fiduciary liability policy is usually okay. This is a first-party coverage value add that probably doesn’t materially influence a purchasing decision and may confer an unexpected benefit. Plus, the sublimit is often sufficient to cover losses of the type insured. (Check out our earlier post for an explanation of this coverage: http://bizinsandouts.com/2019/04/24/fiduciary-liability-insurance-ill-bet-you-didnt-know-about-irs-remedial-program-epcrs-coverage/ ).
Other types of sublimits may provide an insufficient amount of coverage and come as a surprise but might reasonably have been expected. For example, property policies that provide coverage for the perils of earthquake or flood often sublimit those coverages. Similarly, the types of cyber policy sublimits described above are common. But cyber policies that do not sublimit these coverages are also available, and the pricing difference, while material, is often not prohibitive.
Still other types of sublimits are more insidious. Insurers often exclude certain exposures and then add back coverage for those exposures subject to an unreasonably low sublimit, as a way to eliminate any potential path to reasonable coverage for the exposure. The final example above, a sexual abuse/molestation or assault & battery sublimit in a CGL policy, is representative.
Businesses purchase CGL insurance for protection against claims by third-parties that suffer bodily injuries unintended by the business. While individual perpetrators cannot credibly claim that they did not expect or intend an injury, businesses that are sued based on an employee/perpetrator’s conduct may have been merely negligent in hiring or failing to supervise. Businesses may need and could reasonably expect full coverage for these negligence claims. While insurers that use this type of unreasonably low sublimit understand the lack of material value (that’s why they use the device), businesses may not. A business may rely on the existence of this deficient sublimited coverage and forego the purchase of adequate coverage.
A business should approach insurance purchasing decisions intentionally, based on all relevant information concerning insurance availability and pricing, and other risk management options. Here are some specific strategies on sublimits. First, secure quotes from multiple insurers and identify and compare all sublimits in those quotes. Second, fully discuss proposed sublimits with your broker or agent. Consider addressing (a) why is there a sublimit?; (b) is coverage available without a sublimit?/what would that cost?; (c) is more/better coverage available in a different product?; (d) how do any umbrella/excess policies treat the sublimit? Third, consider whether your business has a non-negligible risk of exposure in excess of the sublimit. This may require research about the frequency, severity and costs of sublimited exposures in the real world. We can help.