Eric Eggert, Business Development Specialist, explains the difference of ‘inside the limits’ vs ‘outside the limits’ defense costs on General Liability policies.
Most General Liability policies include defense costs outside the limit of liability. This means that any costs incurred by the insurance company while defending a claim against the insured does not reduce the limit maintained. This allows the entire liability limit to be used for judgments.
For example, if you maintain a $1,000,000 limit of General Liability and have a claim in which the insurance company ends up paying $300,000 in defense costs, you would still have the entire $1,000,000 available for any judgments.
On the other hand, defense costs inside the limit of liability means that any money spent on defense costs would reduce the total limit of liability. If you take the same example from before maintaining a $1,000,000 limit of General Liability and have a claim that totals $300,000 in defense costs, you would only have $700,000 available for any judgments. Defense Costs outside the limit are more preferable than inside the limit and are normally seen in an E&O and Professional Liability policies such as Directors & Officers Liability.