Fifth Circuit Reverses Mississippi District Courts Interpretation Of Ambiguous Language To Nullify Defense Within Limits Coverage

Insurance policies that include the cost of defending a particular claim or action within the policy's limit of liability, often referred to as "burning," "eroding," or "defense within" limits policies, are common in the management liability insurance market. As we previously reported, a 2015 United States District Court for the Southern District of Mississippi decision cast a cloud of doubt over liability insurers issuing defense within limits policies in Mississippi when it held that an insurance policy, which included industry standard defense within limits language, was ambiguous, both on its face and in light of the Mississippi law, and, thus, the defense costs the insurer, Federal Insurance Company ("Federal") had paid pursuant to a reservation of rights did not erode the policy limits. This nullification of key policy language provided a blank check for the insured, the exact opposite of the intended purpose of a defense within limits policy.