INSURANCE GUIDE
Defense Costs in E&O Insurance: Inside vs. Outside the Limit
Defense costs can materially change how much E&O limit remains available after a claim. Some policies reduce the liability limit as legal expenses are paid, while others may provide different treatment.
Why defense-cost treatment matters
Professional-liability claims can involve attorney fees, experts, investigation and other defense expenses. If those costs reduce the policy limit, the amount remaining for a settlement or judgment can decrease as the claim is defended.
Defense costs inside the limit
When defense expenses are inside the limit, covered legal expenses generally erode the available liability limit. For example, a policy with a stated limit does not necessarily leave that entire amount available for settlement after substantial defense spending.
Defense costs outside the limit
Some forms may provide defense costs outside or in addition to the stated liability limit, subject to their own terms, restrictions or caps. This can preserve more of the liability limit for covered damages.
Retentions and deductibles
Review whether the retention applies to damages only, to defense costs, or to both. Also confirm whether separate retentions apply to particular coverages or endorsements.
Other provisions to compare
- Who selects defense counsel
- Whether insurer consent is required before incurring expenses
- Settlement-consent provisions
- Sublimits for disciplinary, subpoena or crisis-response expenses
- Whether certain defense expenses are subject to separate caps
Do not compare limits in isolation
Two E&O policies displaying the same liability limit can provide materially different practical protection because of defense-cost treatment, retentions, sublimits and exclusions.
In this guide
Why defense-cost treatment matters
Professional-liability claims can involve attorney fees, experts, investigation and other defense expenses. If those costs reduce the policy limit, the amount remaining for a settlement or judgment can decrease as the claim is defended.
Defense costs inside the limit
When defense expenses are inside the limit, covered legal expenses generally erode the available liability limit. For example, a policy with a stated limit does not necessarily leave that entire amount available for settlement after substantial defense spending.
Defense costs outside the limit
Some forms may provide defense costs outside or in addition to the stated liability limit, subject to their own terms, restrictions or caps. This can preserve more of the liability limit for covered damages.
Questions about this coverage?
Talk with ECLICK about your current policy, upcoming renewal, or the coverage you are comparing.