Exhaustion of Limits
Key Takeaway
The point at which all available coverage under an insurance policy has been consumed by defense costs, settlements, or judgments. Once limits are exhausted, the insurer has no further payment obligation for that claim or policy period.
Definition
The point at which all available coverage under an insurance policy has been consumed by defense costs, settlements, or judgments. Once limits are exhausted, the insurer has no further payment obligation for that claim or policy period. Monitoring limit erosion during active claims is essential for firms to plan for potential excess exposure.
Why This Matters for Law Firms
This term defines the boundaries of what your insurance will and will not pay for. Law firms that misunderstand coverage terms risk discovering gaps in protection only after a claim has been filed, when it is too late to remedy the situation. Reviewing these terms with your broker before binding coverage is a critical risk management step.
Example Usage in Context
During a coverage review meeting, the firm administrator might note: "Our policy includes a exhaustion of limits provision -- let's make sure we understand exactly what that means for our specific practice areas before we sign off on the renewal."
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