Defense Outside the Limit
A policy structure where defense costs are paid in addition to the policy limit, preserving the full limit for settlements and judgments.
What It Is
Defense Outside the Limit (also called 'supplementary payments' or 'defense in addition to limits') is a policy structure where legal defense costs are paid separately from and in addition to the policy's coverage limit. The full policy limit remains available for indemnity payments (settlements and judgments) regardless of how much is spent on defense.
This structure is standard in Commercial General Liability policies and some umbrella policies. It is less common but increasingly available in professional liability, D&O, and EPLI policies—usually at a higher premium. The additional cost is often justified by the significantly greater effective coverage provided.
Defense outside the limit eliminates the tension between defending aggressively and preserving coverage for settlement. The insured and their counsel can pursue the best defense strategy without worrying that legal costs are reducing the available limit. This can lead to better defense outcomes and lower ultimate claim costs.
Why It Matters for Brokers
When available in professional liability and management liability policies, defense outside the limit represents a significant coverage enhancement. Brokers should always explore whether this option is available and present the cost comparison to clients. The premium increase for defense outside the limit is typically 10-20%, but the effective coverage increase can be 30-50% or more when accounting for defense cost savings.
Real-World Example
Two accounting firms each face a $800,000 malpractice claim with $350,000 in defense costs. Firm A has a $1M E&O with defense inside the limit: pays $350,000 defense + $650,000 settlement (limit exhausted) = $1M policy payment, firm pays $150,000 of the $800,000 settlement. Firm B has a $1M E&O with defense outside the limit: pays $350,000 defense (outside limit) + $800,000 settlement (within $1M limit) = $1.15M total policy payment, firm pays $0. Same $1M limit, same claim—Firm B's policy effectively provided $1.15M in total coverage vs. Firm A's $1M.
Common Mistakes
- 1Not asking carriers whether defense outside the limit is available for professional liability, D&O, and EPLI policies—it is available from some carriers but must be specifically requested.
- 2Dismissing the premium increase for defense outside the limit without calculating the effective coverage enhancement it provides.
- 3Assuming all CGL policies provide defense outside the limit—while this is the standard, some non-standard or surplus lines CGL policies provide defense inside the limit.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker highlights the defense cost treatment on every liability policy and calculates the effective coverage difference between defense inside and outside the limit based on typical defense costs by claim type. The system includes defense cost treatment as a key comparison factor when presenting competing quotes, ensuring brokers and clients can make informed decisions about this critical coverage feature.