Example of Excess Liability Policy Coverage Gaps A Respects Defense Costs

Policy Limits:
Policy Type Aggregate Limit Defense Costs Covered
Primary (underlying) $1,000,000 In Addition
Excess Liability $4,000,000 Within Limits
Assuming First Loss:
Indemnity: $1,000,000
Defense Costs: $ 200,000
Total Loss: $1,200,000

Primary Policy Pays: $1,200,000 total

The primary policy limits are now exhausted.
Assuming Second Loss:
Indemnity: $3,500,000
Defense Costs: $1,500,000
Total Loss: $5,000,000

Excess Policy Pays: $4,000,000 total
(including $3,500,000 for indemnity
and $500,000 for defense costs)

The Excess Liability policy limits are now exhausted
and the insured is short $1,000,000 in coverage!