Defence costs paid “inside the limit” come out of the same sum insured that pays the claim — every pound spent on lawyers reduces what is left for the settlement. Defence costs paid “outside the limit” are funded by the insurer in addition to the sum insured. The difference can be the difference between a policy that resolves a claim and one that runs out of money before the case ends.
What defence costs inside or outside the limit means in PI insurance
Professional indemnity policies are written to pay two things when a claim is notified: the damages or settlement owed to the claimant, and the legal and expert costs of defending or investigating the matter. How those defence costs are funded is one of the most important wording points in any UK PI policy, and it sits in the policy schedule under “limit of indemnity”, “costs and expenses” or a similarly-titled clause.
“Inside the limit” — sometimes written as “costs inclusive” or “costs within the limit” — means defence costs are paid from the limit of indemnity. If the policy is £500,000 each and every claim, and £180,000 is spent on lawyers and experts defending the matter, only £320,000 remains to pay the eventual settlement or judgment.
“Outside the limit” — sometimes “costs in addition” — means defence costs are paid by the insurer over and above the limit of indemnity. The £500,000 limit is preserved for the settlement, and the legal costs are funded separately.
UK PI policies sit across both structures depending on the profession, the insurer and the layer. SRA minimum terms for solicitors require costs in addition. Many architects, surveyors and accountants policies are written costs inclusive at the primary layer. Larger and excess layers can flip the position again.
How defence costs inside or outside the limit work in practice
When a claim is notified, the insurer takes conduct of the defence under the policy’s claims-handling clause. Lawyers and experts are appointed, investigations run, and over the months or years until resolution the defence spend accumulates.
On a costs-inside policy, the insurer’s reserve for the claim is a single combined figure that has to cover damages plus defence. If the claim runs hot — long disclosure, multiple expert reports, contested liability — defence costs can eat 30% to 50% of the limit before settlement is on the table. The insured then negotiates settlement against a depleted limit, which means the claimant either accepts less than they were asking or pursues the firm personally for the shortfall.
On a costs-outside policy, the insurer treats defence costs as a separate pot. The limit remains available in full for settlement. The insurer carries the cost-and-expenses exposure on top of the indemnity exposure, which is why costs-outside wordings usually carry a higher premium for the same limit.
The wording is the controlling document. The schedule will say something like “limit of indemnity £500,000 any one claim — costs and expenses in addition” or “…— costs and expenses inclusive”. Read both lines together.
Worked example with realistic numbers
A small UK consultancy carries £500,000 each-and-every-claim PI with a £2,500 excess. A client claims £420,000 in losses from negligent advice. The case runs for eighteen months: counsel’s fees, two expert reports, disclosure, mediation. Defence costs total £140,000 by settlement.
On a costs-inside policy: the insurer has £500,000 to spend in total. £140,000 has gone on defence. £360,000 is left to fund settlement. The claimant wants £420,000. The insurer pays out the £360,000 remaining limit; the consultancy is exposed for the £60,000 gap plus its £2,500 excess. If the case had gone to trial and defence costs hit £200,000, only £300,000 would be left for a settlement or judgment.
On a costs-outside policy: the insurer pays the £140,000 defence costs separately. The full £500,000 remains available for settlement. The claim is settled at £420,000 inside the limit; the consultancy pays its £2,500 excess and walks away clean.
Same claim, same limit, same defence spend — £62,500 of personal exposure on one wording, none on the other.
When this matters most
Costs-inside versus costs-outside matters most in three situations.
First, on policies where the limit is close to the realistic worst-case claim value. A sole practitioner carrying £250,000 of cover against work that could plausibly produce a £200,000 claim has very little headroom for defence spend on a costs-inside policy. A modestly-contested claim erodes the limit faster than the firm expects.
Second, on long-tail claims that are likely to be contested. Construction professional claims, audit negligence claims and surveyors’ valuation claims often run for years, involve multiple experts and generate substantial costs. Defence spend on a contested audit negligence case can run into hundreds of thousands.
Third, where the firm has regulatory exposure that runs alongside the civil claim. Costs of responding to a regulator are sometimes covered separately but can leak into the defence costs line; on a costs-inside wording that erosion is direct.
Common variations and market wording
Most market wordings sit in one of four positions.
Costs in addition (outside the limit). Solicitors’ MTC requires this at primary level. Some accountants, surveyors and architects policies offer it as standard; others offer it as an option at additional premium. Wording: “costs and expenses payable by the Insurer in addition to the limit of indemnity”.
Costs inclusive (inside the limit). Common at primary level for many professions outside solicitors. Wording: “the limit of indemnity is inclusive of costs and expenses” or “costs and expenses form part of the limit”.
Costs in addition with cap. A middle position: defence costs are payable in addition up to a stated cap, then come inside the limit. A typical cap is the limit of indemnity itself or a multiple of it. Wording: “costs and expenses in addition up to the amount of the limit of indemnity, thereafter within the limit”.
Pro-rata or proportional. If the claim exceeds the limit, defence costs are shared between insurer and insured in the same proportion as the claim sits inside and outside the limit. Less common, but it appears on excess-layer wordings.
Some policies treat investigation costs (insurer’s costs of looking at the claim before formal defence) differently from defence costs. Some treat regulatory defence costs separately again. Read the schedule line by line.
Related concepts
Defence costs interact directly with the aggregate limit — on an aggregate policy, defence spend on one claim depletes the pot available for any later claim in the period. They also interact with the excess, which the insured pays before the insurer’s funding kicks in. And the civil liability extension broadens the trigger for what defence costs respond to in the first place.
Frequently asked questions
Is defence costs inside the limit worse than outside?
For the insured, costs outside the limit is the better wording — it preserves the full sum insured for settlement and shifts the defence cost risk to the insurer. Costs inside the limit is cheaper but exposes the insured to settlement shortfall if defence spend is heavy. The right choice depends on premium, limit, profession and worst-case claim profile.
Do SRA minimum terms require costs outside the limit?
Yes. The Solicitors’ Regulation Authority Minimum Terms and Conditions require that defence costs are payable in addition to the minimum £2m or £3m limit of indemnity. A solicitors’ qualifying insurance contract written costs-inside would not meet the SRA’s required terms. Top-up layers above the minimum can be written differently.
What about ARB, RICS and ICAEW?
ARB’s PI criteria do not specify defence costs treatment, leaving the position to the policy. RICS minimum terms permit costs inside or outside the limit, but require the policy to disclose the position clearly. ICAEW’s PII Regulations require firms to consider whether costs are inside or outside when assessing whether cover is adequate, without mandating one position.
How do I tell which my policy uses?
Look at the policy schedule under the limit of indemnity entry. The phrases to search for are “costs in addition”, “costs inclusive”, “costs and expenses within the limit” or “costs and expenses in addition to the limit”. If the schedule is silent, the policy wording itself will have a defence costs clause that resolves the position. Ask your broker if it is not clear.
Can I switch from costs inside to costs outside at renewal?
Often yes, at additional premium. The insurer will reprice the policy on a costs-outside basis. The uplift varies — typically anywhere from 10% to 30% on the same limit, depending on profession, claims experience and insurer. For firms operating close to their limit on worst-case claims, the trade is usually worth pricing.
What happens to defence costs if the claim exceeds my limit?
On a costs-inside policy, defence costs come out of the limit until it is exhausted, then fall on the insured. On a costs-outside policy, the insurer continues to fund defence on the part of the claim within the limit; the insured funds defence on the excess part. The exact split is governed by the wording and can be pro-rata or based on the insurer’s reasonable judgment.
Does costs-inside apply to investigation as well as defence?
Usually yes — most policies treat investigation costs (the early phase before formal defence) the same as defence costs for limit purposes. Some wordings carve out a separate investigation-costs pot. Check the definitions in the wording and the schedule.
Are claimant costs included?
If the insured loses or settles, the claimant’s legal costs are usually awarded against the insured and form part of the indemnity claim. Whether those claimant costs are paid inside or outside the limit follows the same wording position as defence costs — though some policies treat them differently. The wording controls.
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About Apex Insurance Brokers Ltd
Apex Insurance Brokers Ltd is a Bristol-based independent insurance broker authorised and regulated by the Financial Conduct Authority (firm reference number 724952). Companies House registered number 07014570. We arrange professional indemnity insurance for UK professional firms across architecture, surveying, accountancy, consultancy and related sectors. Contact: info@apexinsurancebrokers.co.uk or 0117 325 0027.
Last reviewed: May 2026 by Apex Insurance Brokers Ltd.
Important: this article is general information, not advice on your specific circumstances. For advice on PI insurance for your firm, contact us on 0117 325 0027 or info@apexinsurancebrokers.co.uk.