How UK PI Insurers Differ on Defence Costs

Why defence costs are half the product

Professional indemnity does two jobs: it pays what you legally owe a claimant, and it pays lawyers to defend you — including against claims that ultimately fail. In many professional disputes the legal spend is substantial relative to the damages, and it starts accruing the moment a claim is intimated, long before anyone knows whether it has merit. How a wording accounts for that spend is therefore not a footnote; it determines how much of your limit is actually available to resolve the claim itself.

Costs in addition vs costs within the limit

The central split in the UK market. Where defence costs are in addition to the limit of indemnity, the full limit remains available for damages and claimant costs, with the insurer’s own defence spend sitting on top (sometimes capped at a stated multiple or amount, sometimes uncapped). Where defence costs are within (or “inclusive of”) the limit, every pound spent on your defence erodes what is left to pay the claim. Under a costs-inclusive £1m policy, a long-running defence can consume a large share of the limit before any settlement is funded — a £1m promise that may deliver far less than £1m of indemnity when it matters. Some professional-body minimum wordings mandate the costs-in-addition basis; in the open market, both bases are common and the schedule or wording must be read to know which you have.

Cost-inclusive excesses vs damages-only excesses

The same question repeats at the excess. Under a damages-only excess (“excess not applicable to defence costs”), the insurer funds the defence from the first pound, and your excess is only payable if damages or a settlement are ultimately paid. Under a cost-inclusive excess, you pay the defence bills yourself until the excess is exhausted — which, with an unfounded claim that is defended and dropped, can mean paying the full excess despite never owing the claimant anything. For a firm facing frequent small notifications, the excess basis can matter more in practice than the headline excess amount. Insurers differ by profession and risk on which basis they offer, and the same insurer may offer either at different price points.

Consent to settle and control of the defence

PI policies give the insurer significant control of the defence: they appoint the lawyers (usually from a panel), and the wording typically requires their consent before you admit liability or settle. The mirror question is what happens when you and the insurer disagree about fighting on. Many UK wordings answer it with a KC clause (historically the QC clause): if the insured does not want to contest a claim the insurer wishes to defend — or, in some versions, vice versa — the dispute is referred to a King’s Counsel, whose opinion on whether the claim should be contested binds the parties. Wordings differ on the exact trigger, on who pays for the opinion, and on whether the clause protects the insured, the insurer, or both directions. For a professional whose reputation is at stake in the allegation itself, these clauses deserve reading before a claim, not during one.

Settlement pressure and its limits

A related family of provisions addresses the insured who refuses a settlement the insurer supports. Some wordings cap the insurer’s liability at what the claim could have been settled for, plus defence costs to that date — leaving the insured funding the fight beyond that point. Others rely on the KC mechanism described above to resolve the standoff. The commercial effect is the same in both cases: the wording decides how much room you have to fight on principle at the insurer’s expense. Firms in reputationally sensitive professions should know which mechanism their policy uses.

Why two £1m policies are not the same policy

Put the axes together and the comparison problem is obvious. A £1m limit with costs in addition and a damages-only excess is a materially bigger promise than a £1m costs-inclusive limit with a cost-inclusive excess — same headline number, different product. Neither is “wrong”: the leaner basis is legitimately cheaper and may suit a low-severity risk. But a price comparison that ignores the costs basis is comparing two different quantities of insurance. When reviewing quotes, put four items side by side: limit, limit basis (any one claim or aggregate), costs treatment at the limit, and costs treatment at the excess.

What to check in your own wording

Locate the definition of the limit of indemnity and check whether defence costs are stated to be in addition or inclusive — and if in addition, whether they are capped. Check the excess clause for the words applying it to costs and expenses, or excluding them. Find the consent-to-settle provision and any KC/QC clause, and note who it binds. If a client contract or professional body requires a specific costs basis, verify your policy matches it rather than assuming.

Frequently asked questions

What does defence costs in addition to the limit mean?

The policy limit is reserved for damages and claimant costs; the insurer’s spend on defending you sits on top of it, sometimes subject to its own cap. Under the alternative — costs within the limit — defence spend erodes the limit available to pay the claim.

Does my excess apply to defence costs?

It depends on the wording. A cost-inclusive excess means you pay defence bills up to the excess even if the claim fails. A damages-only excess is triggered only if damages or a settlement are paid. The excess clause states which basis applies.

Can my insurer settle a claim without my agreement?

Most UK PI wordings require cooperation on both sides: the insurer controls the defence and needs your cooperation, while you need the insurer’s consent to admit or settle. Where the two sides disagree about contesting a claim, many wordings refer the question to a King’s Counsel whose opinion is binding.

What is a QC clause (now KC clause) in professional indemnity insurance?

A dispute-resolution mechanism found in many UK PI wordings: when insured and insurer disagree over whether a claim should be contested, the question is put to a King’s Counsel, and the opinion binds the parties. Versions differ on the trigger, direction and who pays.

Why do two £1m PI policies cost different amounts?

Often because they are different products. Costs basis at the limit, costs basis at the excess, limit basis (any one claim vs aggregate), retroactive cover and exclusions all change what a £1m policy actually delivers. Compare those terms, not just the premium and the headline limit.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952).