Defence costs: inside your PI limit, or on top of it?

Almost every professional indemnity conversation fixes on one number: the limit of indemnity. It is the figure on the schedule, the figure a client contract demands, the figure that gets compared at renewal. But the limit only tells you how much the insurer will pay in total. It does not tell you what that pot of money has to stretch to cover — and the item most likely to start eating into it, long before a penny reaches the person bringing the claim, is the cost of defending the claim in the first place.

For a smaller practice with occasional, modest disputes, the point can stay academic for years. For a larger firm — higher-value engagements, more complex matters, and a greater likelihood of a claim that is worth contesting rather than quietly settling — it is one of the most consequential lines in the whole policy. This piece explains the distinction, why it bites hardest on exactly the claims you most want to fight, and what to put on the renewal checklist.

The distinction that hides in the wording

Defending a professional negligence claim is rarely cheap. Solicitors, expert witnesses, investigators and counsel all have to be paid, and their fees mount up long before anyone decides whether the firm was actually at fault. The policy has to say who carries that cost, and there are two broad answers.

The first is costs-inclusive cover, sometimes written as “costs within the limit” or “limit inclusive of costs”. Here, defence costs come out of the same pot as any damages. Every pound spent on lawyers is a pound less available to settle or pay the claim. The second is costs in addition, where defence costs are met on top of the limit, so the full sum insured is preserved for the claim itself and the cost of the defence sits alongside it.

Two policies can both say “£2 million limit of indemnity” and mean materially different things in practice. The headline is identical; the real protection is not. This is not an exotic or fringe term — it is a standard, well-established distinction in the UK PI market, and it is settled quietly in the wording rather than advertised on the certificate.

Why it bites hardest on the claims worth fighting

There is an uncomfortable irony here: the treatment of defence costs matters most on precisely the claims a firm most wants to contest. If a claim is weak or misconceived, the instinct — often the right one, both financially and for reputation — is to defend it rather than pay to make it go away. But mounting a robust defence takes money.

On a costs-inclusive policy, that defence erodes the very limit you are relying on. A long, expensive and ultimately successful fight can consume a large slice of the limit before the outcome is even known — and if the case then turns against the firm, what is left may not be enough to meet the award. To put rough numbers on it purely for illustration: on a £2m costs-inclusive limit, £400,000 of defence spend leaves £1.6m for damages; on a costs-in-addition wording, the full £2m stands and the defence is funded separately. Those figures are illustrative only — the point is the shape of the problem, not any particular sum.

Larger firms tend to feel this most acutely. Bigger instructions, more sophisticated counterparties and more complex facts all make a hard-fought, well-resourced defence more likely — which is exactly the scenario in which a costs-inclusive limit quietly shrinks.

The solicitors’ benchmark — and why it can mislead everyone else

There is a useful real-world reference point. Solicitors’ practices in England and Wales must hold compulsory cover that complies with the Solicitors Regulation Authority’s Minimum Terms and Conditions — a mandatory wording that strips out many exclusions an insurer might otherwise want. One of its features is that defence costs are met in addition to the minimum sum insured (the compulsory minimum being £2 million for most firms, and £3 million for those incorporated as companies or LLPs). In other words, on that compulsory layer a solicitor’s full limit is preserved for the claim, and the cost of the defence is funded on top.

That protection is generous — but it is specific. It is guaranteed only on the compulsory primary layer of a solicitor’s cover. Professionals outside the solicitors’ regime — architects, accountants, surveyors, engineers, consultants, IT professionals and many others — buy their PI in the open market, where either treatment of defence costs is possible and neither is mandated. It is easy to assume the solicitors’ standard is the market norm. It is not. If your cover is not written on the SRA Minimum Terms, the only way to know how your defence costs are treated is to read the wording.

How it compounds in a layered programme

For firms large enough to buy their limit as a “tower” — a primary policy with excess layers stacked above it — the costs question does not stay confined to one policy. If defence costs erode the limit, they erode the layers with it. A single, heavily defended matter can burn through the primary and start drawing on the excess layers sooner than anyone expected, or in the worst case exhaust much of the programme on one claim. Where costs are met in addition, that capacity is preserved for indemnity and the tower keeps its intended height.

The practical warning is that the treatment of defence costs needs to read consistently up the tower, not just on the primary. A programme that is costs-in-addition at the bottom but costs-inclusive higher up behaves inconsistently in a large loss — another version of the difference-in-conditions problem that catches firms who compare limits but not wordings.

Two related questions worth asking in the same breath

While you are looking at how defence costs are treated, two neighbouring points are worth settling. The first is whether the policy excess applies to defence costs or only to damages — wordings vary, and it changes what the firm pays out of pocket on every claim, not just the large ones. The second is who controls the defence: whether the insurer or the firm has the final say on instructing lawyers and on settling, and whether there is a provision allowing a dispute about settlement to be referred to senior counsel. These are not costs-treatment questions as such, but they decide how a defence is actually run — and therefore how quickly the costs, however they are funded, accumulate.

Put it on the renewal checklist

Autumn is renewal season for a large share of the profession — solicitors in particular have long clustered around a common renewal date at the start of October — which makes now a sensible moment to ask the question before the schedule is signed rather than after a notification. Four lines cover most of it. Are defence costs inside the limit or payable in addition? Is that treatment the same on every layer of the programme? Does the policy excess apply to defence costs? And who controls the conduct of the defence and the decision to settle? A broker who placed the cover should be able to answer all four in a sentence each.

Frequently asked

Is “costs in addition” always better than “costs inclusive”?
It is generally the more protective of the two, because it preserves the full limit for the claim itself. But it is usually reflected in the terms and pricing of the cover, so it is not simply free. The important thing is not to assume — know which basis your policy is written on, so you can judge whether the usable protection matches what your clients and contracts expect.

My client contract requires “£2m professional indemnity”. Does the costs treatment affect whether I comply?
A contract usually specifies a limit rather than how defence costs are treated, so a costs-inclusive policy will often satisfy the wording. But it can deliver less usable indemnity than the counterparty imagines, because a serious defence would erode that £2m. If a contract is important, it is worth clarifying — and, where you can, negotiating — rather than leaving the assumption unexamined.

How do I find out which basis my cover is on?
It is set out in the policy wording and schedule, usually under the limit of indemnity or a defence costs clause. If it is not obvious — and it often is not — your broker should be able to confirm it in a line, and flag whether it is consistent across every layer of a stacked programme.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This article is general information, not advice on a specific policy.