Liability · Insurance Term
Defense Costs (Defense Outside Limits)
Definition
Defense costs are the legal expenses of defending you against a covered lawsuit, including attorney fees, expert witnesses, court costs and investigation. Whether they are paid on top of your policy limit or reduce it is one of the most important, and most overlooked, details in a liability policy.
In Plain English
In a standard commercial general liability policy, defense is usually paid outside the limits. That means a $1 million policy can pay legal bills and still have the full $1 million for a settlement or judgment. The insurer's duty to defend usually ends once the limit is used up paying judgments or settlements.
Many specialty policies, such as employment practices and directors and officers coverage, and some surplus lines liability policies, put defense within the limit. Every dollar spent on lawyers then reduces what is left to pay a settlement. These are sometimes called eroding or burning limits.
Defense can also be affected by a reservation of rights, where the insurer defends while questioning coverage. Some policies require you to pay defense costs inside a self-insured retention before the insurer steps in.
Not sure how your policy handles this? Have us review it, or get a quote.
Example
Hypothetical and simplified: An owner has a $1 million policy with defense within limits. A lawsuit costs $300,000 to defend and settles for $900,000. Only $700,000 of the limit is left after defense costs, so the owner may owe the remaining $200,000. With defense outside limits, the full $1 million could go toward the settlement.
What to Watch For
- Ask whether each liability policy pays defense inside or outside the limit.
- Check surplus lines policies for endorsements that change how defense is paid.
- If your policy has a self-insured retention, confirm whether defense costs count toward it.
- Consider higher limits or an umbrella when defense is within limits.
Last updated October 14, 2026 · Primesure editorial team · How We Write