(a) Prior to the original promulgation of this Part in 1983, the Department of Financial Services had approved a limited number of personal injury and property damage liability insurance policies in which legal defense costs were permitted to reduce the stated limits of liability when such legal defense costs were incident to a claim of legal liability covered under the policy. Further, the department had also approved certain policies that permitted legal defense costs to be applied against the deductible.

(b) Other than those limited circumstances, personal injury and property damage liability insurance policies generally provided that legal defense costs incident to a claim of legal liability and incurred in defending a claim of legal liability under the policy were covered by the policy independent of the stated limits of liability. Those policies placed no limit on defense costs and the stated limits of liability were used solely to pay the amount of damages, up to those liability limits, as ultimately determined by judgement or settlement. In such policies, any deductible was also applied only against the amount of a judgement or settlement.

(c) This Part was originally promulgated to provide rules restricting the lines of business wherein legal defense costs could be offset against the liability limits or against the deductible, and to provide for adequate disclosure to the insured in such cases. At that time, the department was advised by insurers that legal defense costs for directors and officers liability and media, publishing and advertising liability, where reputational interests are of significant concern to the insured, were relatively high compared with actual loss payments. With the legal defense costs offset, insurers can more easily estimate their maximum potential losses, provide such specialized coverages, and determine appropriate rates for such coverages.

(d) Subsequent amendments to this Part arose out of this department's concern with the proliferation of liability policies containing legal defense cost offset provisions for other types of risks. While these policies contained the required notification to insureds the department was concerned with the escalating use of these legal defense cost offset provisions, for the following reasons:

(e) The superintendent concluded that the public interest demanded that legal defense cost offsets against liability limits or deductibles be permitted only with respect to such lines, sublines, classes or subclassed where:

(f) In amending this Part, the superintendent considered such factors as:

(g) These amendments set forth limitations on the type of risk or coverage for which legal defense costs would be permitted to be offset against liability limits or policy deductibles, as well as the dimensions of any such offset, and specified minimum liability limits for any policy containing these offsets.

(h) Large insureds, as evidenced by their financial size or the level of insurance coverage obtained, tend to be more knowledgeable insurance consumers than smaller, usually less sophisticated insureds and, therefore, are more typically in a better position to protect themselves or to negotiate protections for themselves from their insurers. Given their larger size and greater sophistication, these insureds should be more able to respond to claims out of their own resources if their insurance coverage is depelted by defense cost offsets. In turn, insurers warrant more flexibility in tailoring their policies to the individual needs of larger, more sophisticated insureds in order to provide coverage to them efficiently and effectively. In recognition of these factors, amendments to this Part exempt policies issued to large insureds from a number of the requirements of this Part, thus permitting defense cost offsets in liability policies in the event that the insured exceeds specified size criteria set forth in section 71.3(e) of this Part.

(j) Marketplace developments since this Part was originally adopted have resulted in the widespread use of policies with defense costs offset against the limits of liability and the increase in knowledge and sophistication of insureds and insurance agents and brokers with respect to this type of policy. Accordingly, this Part is amended to add employment practices liability to the list of coverages that may be written on a defense within limits basis; lower the financial threshold requirements for large commercial insureds; and allow for alternative disclosure statement requirements.