Defence costs

Category: Claims and policy principles · Reviewed by the Apex broking team · Last reviewed 2026-08-22 · ~6 min read

What counts as defence costs

A typical definition covers fees, costs and expenses reasonably incurred with the insurer's consent in the investigation, defence, settlement or appeal of a claim. That normally captures solicitors and counsel, expert witnesses and technical consultants, court and mediation fees, and adverse costs the insured is ordered to pay. It may also extend, expressly, to the costs of attending an inquest, of responding to a regulatory investigation, or of legal representation at a disciplinary hearing.

What is not usually included is just as important: the insured's own management time, the cost of remedial work, and the fees of putting right the underlying problem. Those are business costs, not defence costs, however directly the claim caused them.

Costs-inclusive and costs-in-addition

There are two basic structures. On a costs-inclusive policy the limit of indemnity is a single pot from which both damages and defence costs are paid, so every pound spent defending is a pound less available to settle. Professional indemnity and directors and officers wordings are commonly written this way. On a costs-in-addition policy the defence costs sit outside the limit, so the full limit remains available for damages. Public and products liability and employers' liability wordings are more often written this way, though not invariably.

There are intermediate forms: costs in addition subject to their own separate sub-limit; costs in addition up to a multiple of the indemnity limit; and, on some wordings, costs shared proportionately where a settlement exceeds the limit. The mechanics and the way this interacts with limit structures are dealt with in defence costs inside versus outside the limit.

When comparing quotations, two policies with the same limit are not comparable unless the costs basis is the same. A costs-inclusive limit on a class of business with heavy defence spend can be worth materially less than a lower costs-in-addition limit.

Who controls the defence

Most liability wordings give the insurer the right, and often the obligation, to take over and conduct the defence in the insured's name. Alongside that sit conditions requiring the insured not to admit liability, not to settle, and not to incur costs without consent; and requiring cooperation and assistance. Those provisions are frequently drafted as conditions precedent, so incurring legal costs before notifying the insurer can put recovery of those costs in issue.

Insurers usually appoint from a panel, at rates agreed with the panel firm. Where an insured has a strong reason to want its own solicitors — sector expertise, an existing relationship, a conflict — that is a point to negotiate at inception, when a named-firm endorsement or a rate agreement can be built in, rather than in the week the claim arrives.

Advancement, allocation and disputed cover

Where cover is disputed, the practical question is whether the insurer will fund the defence while the coverage argument runs. Better wordings provide for defence costs to be advanced, subject to repayment if it later turns out the claim was not covered. Without an advancement provision, an insured can be left funding its own defence during the period when cash is hardest to find.

Allocation is the other recurring problem. Where a claim mixes covered and uncovered allegations, or involves both insured and uninsured defendants, the costs have to be split. Wordings vary from a bare requirement to agree a fair and proper allocation to a stated formula or a deeming provision that treats all costs as covered where any part of the claim is. The difference is worth reading before it is worth arguing about.

Related to this are dishonesty and fraud exclusions. Most professional wordings will fund a defence against an allegation of dishonesty and claw the money back only if dishonesty is finally established, which is a materially better position than an exclusion that bites on allegation alone.

How the excess applies

Whether the excess applies to defence costs, or only to damages, is a small piece of wording with a large practical effect on smaller claims. Some policies apply the excess to costs and damages combined; some apply it to damages only, so the insurer funds the defence from the first pound.

The professional indemnity market for regulated professions shows how much this can matter. Under ICAEW's approved minimum policy wording for accountancy firms, the policy excess must not apply to the payment of defence costs unless the claim arises from work that required FCA authorisation. A firm comparing a compliant wording with a superficially similar non-compliant one may be looking at a real difference in outcome on every small claim it ever has.

Regulatory and criminal proceedings

Increasingly the costs that hurt are not the costs of defending a civil claim but of responding to a regulator, a statutory investigation, an inquest or a health and safety prosecution. Standard liability wordings do not automatically cover these. Cover is generally available — as a legal expenses section, as an extension to a professional indemnity or management liability policy, or as part of a directors and officers wording — but it is a separate purchasing decision with its own limits and its own definition of what triggers it.

Where cover exists, it is usually limited to representation costs and does not extend to fines or penalties, which are ordinarily uninsurable as a matter of public policy.

Why it matters

Defence costs decide the economics of most liability claims. They determine whether a defensible claim is defended or settled for nuisance value, whether the limit survives to pay damages, and whether the insured has to find cash at the worst possible time. Of all the questions worth asking about a liability quotation, “are costs inside or outside the limit, and does the excess apply to them” is the one with the highest ratio of value to effort.

Frequently asked questions

Are defence costs paid on top of the policy limit?

It depends on the wording. Costs-in-addition policies pay defence costs outside the limit, leaving the full limit for damages. Costs-inclusive policies pay both from the same limit, so defence spend erodes what is left to settle. Professional indemnity and D&O are commonly costs-inclusive; public and employers' liability are more often costs-in-addition.

Can I use my own solicitors?

Usually only with the insurer's agreement. Most wordings give the insurer the right to conduct the defence and to appoint from its panel. If you need a particular firm, negotiate a named-firm endorsement or an agreed rate at inception rather than trying to change it once a claim is live.

Will insurers fund my defence while they investigate cover?

Only if the policy provides for defence costs to be advanced, usually subject to repayment if the claim turns out not to be covered. Without such a provision you may have to fund the defence yourself while the coverage position is resolved, so it is a provision worth checking before you need it.

Does the excess apply to defence costs?

That varies by wording. Some policies apply the excess to damages and costs combined, others to damages only. Under ICAEW's approved minimum wording for accountancy firms the excess must not apply to defence costs unless the claim arises from work requiring FCA authorisation, which shows how much difference the point can make.

Related entries

• Defence costs inside versus outside the limit
• Professional indemnity insurance
• Directors and officers insurance
• Public liability insurance
• Professional indemnity deductible

This entry is part of the Apex Insurance Wiki. It states the position as at August 2026. Last reviewed 2026-08-22. Next review: 2027-02-22. It is general insurance information, not legal advice, and not regulated advice on a specific policy.

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