In an eroding limits policy, every dollar spent on defense reduces the limit available for indemnity. These forms are common in professional liability, directors and officers, and some healthcare and long-term care programs.
The practical result is that a vigorous defense consumes the same fund that would otherwise pay the claimant, so defense spending and settlement capacity are in direct tension.
Alternative Names:
Wasting Policy, Burning Limits Policy, Self-Consuming Policy
Why it Matters?
Eroding limits change the economics of defense strategy completely. Extended motion practice and expert work can leave inadequate limits to resolve a serious claim, which in turn creates excess exposure and a potential conflict between insurer and insured. Both sides need to track burn rate against remaining limits and revisit resolution timing as the fund depletes.
Frequently Confused with
Related terms
Frequently asked questions
Why are eroding limits policies a problem for the insured?
Does an insurer have a duty to warn about limit erosion?
