Defense costs within limits

Defense costs within limits is the mechanism under which every euro of legal fees paid by the insurer reduces the limit left for the indemnity by the same amount. The ISO (Insurance Services Office) CGL (commercial general liability) form, the standard American liability policy, works on another basis. It places defense costs among supplementary payments and states that they do not reduce the limits: the insurer defends alongside the limit, with no meter running. Financial lines went the other way. In a D&O (directors and officers), E&O (errors and omissions) or cyber policy, defense costs are charged against the limit. The market speaks of burning limits, eroding limits, or a wasting policy. A 10 million line that has paid 4 million in lawyers offers only 6 million for the settlement or the judgment. That follows from the profile of these claims. Defending a securities class action or a regulatory investigation often costs more than the final indemnity, and an insurer carrying it outside the limit would have no ceiling at all. The consequences show up in the tower. The excess attaching at 10 million is called on sooner, sometimes by defense alone, and an insured that settles quickly preserves limit the lawyers would have burned. In duty-to-defend policies, the insurer controls the spending that erodes the insured's limit, which feeds disputes over the hammer clause and over allocation. On the reserving side, defense costs fall within ALAE (allocated loss adjustment expenses). An underwriter reading an account's loss history therefore counts them with the indemnity, not separately. Some Side A policies offer a separate defense limit or a reinstated limit.