Costs inclusive vs costs in addition

Reviewed by Matthew Bartlett, Director · Last reviewed 2026-06-29

Whether defence costs are paid in addition to the limit of indemnity or within it is one of the most consequential, and most overlooked, features of a professional indemnity (PI) policy. It determines how much money is actually left to pay a claimant once lawyers have been paid.

The two structures

• Costs in addition. The defence costs of investigating and contesting a claim are paid on top of the limit of indemnity. A £1 million limit means £1 million is available for damages, and the costs of defending the claim are met separately.
• Costs inclusive (costs-in-limit). Defence costs are paid out of the same limit as damages. On a £1 million costs-inclusive policy, every pound spent on defence reduces the pound available to settle the claim.

Why the difference is large

Professional negligence litigation is expensive. Expert evidence, counsel and a multi-day trial can run defence costs into six figures. On a costs-inclusive policy, a hard-fought claim can consume a substantial share of the limit before any settlement is reached, leaving the firm to fund the gap personally if the damages plus costs exceed the limit.

Consider a £500,000 costs-inclusive limit, a claim that settles for £400,000 and defence costs of £150,000. Total £550,000, against a £500,000 limit: the firm pays the £50,000 shortfall. On a costs-in-addition policy, the £400,000 settlement sits comfortably within the limit and the £150,000 costs are met separately.

Where each structure appears

Many regulated professions benefit from costs-in-addition cover as standard. The SRA Minimum Terms for solicitors require defence costs to be payable in addition to the sum insured. Voluntary-market policies for accountants, IT consultants and management consultants vary: some offer costs in addition, others apply costs-inclusive limits, particularly at higher limit levels or for higher-hazard activities.

What to check

• Read the limit clause and the definition of "limit of indemnity" together. The treatment of costs is usually spelled out there.
• Where costs are inclusive, consider whether the limit is high enough to absorb both a realistic worst-case settlement and the cost of defending it.
• Watch for hybrid wordings where costs are in addition up to the limit, then shared, which can produce a costs-inclusive outcome on very large claims.

Apex flags the costs basis when comparing quotations, because two policies with the same headline limit can offer very different real-world protection. For sector detail see the accountants PI guide, the IT professionals PI guide and the management consultants PI guide.

The interaction with the excess

The costs basis also affects how the excess operates. On many policies the excess applies to damages and costs combined, so a claim that is successfully defended at significant cost can still erode or exceed the excess even though no damages are paid. Firms should understand whether their excess is "costs inclusive" as well, because a string of defended-but-costly claims can produce real out-of-pocket cost even where the firm is ultimately found not liable. Apex sets out the combined effect of the limit, costs basis and excess so the true retained risk is visible.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. Registered in England and Wales, company number 07014570.