Glossary

Defense costs

The attorney fees, expert fees and other expenses of fighting a claim, which some policies pay on top of the limit and others deduct from it.

Also called: defense expense, legal defense costs, claim expense, defense within limits

Defense costs are what it takes to fight a claim: attorneys, experts, investigators, court costs. Whether they reduce your limit is one of the most important and least read features of a liability policy.

The ISO CGL (CG 00 01) pays defense on top of the limit. Under supplementary payments, expenses the insurer incurs do not reduce the limits of insurance, and the insurer's right and duty to defend ends only when it has used up the limit paying judgments or settlements.

Many professional liability, D&O, employment practices and cyber policies work the other way. Defense sits inside the limit, so every dollar spent on lawyers is a dollar gone from settlement money. This is called defense within limits, or eroding or burning limits. A $1 million limit with a $400,000 defense bill leaves $600,000 for damages (a hypothetical). A few states restrict the practice; Nevada has barred it in most liability policies since October 2023 (AB 398).

Before you buy, ask whether defense is inside or outside the limit, whether the retention applies to it, who picks defense counsel, and whether the insurer can settle without your consent.

defense costs inside vs outside policy limits: why it matters compares the two structures in depth. See duty to defend for when the obligation starts and self-insured retention for who pays first.

Last reviewed October 10, 2026

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Related terms

Duty to defend A liability insurer's obligation to pay for your defense of a lawsuit that could potentially fall within coverage, which is broader than its duty to pay. Loss adjustment expense What an insurer spends to investigate, defend and settle claims, apart from the claim payments themselves. Split into allocated and unallocated expense. Self-insured retention (SIR) The amount of a loss the insured must pay itself, often including defense costs, before the insurer's liability policy begins to pay. Per-occurrence limit The most a liability policy will pay for all damages arising from a single occurrence, however many people are hurt or claims are made. Claims-made policy A liability policy that covers claims first made against you and reported to the insurer during the policy period, whenever the underlying act occurred.

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