Do defense costs typically count toward the policy limit?

• A. Yes, inside the limit
• B. Usually paid outside the limit (in addition to the limit)
• C. Always excluded
• D. They are never paid at all

Answer: (B)

Defense costs are the expenses a policy pays to defend a claim, such as attorney fees and related court costs. In many commercial liability policies, these costs are paid outside the policy limit, meaning they’re in addition to the limit rather than reducing it. This arrangement keeps the full limit available for settlements or judgments while separate defense costs are covered from a different pool. For example, with a $1 million limit, you might have up to $1 million for damages, plus additional defense costs paid outside that limit. Some forms do place defense costs inside the limit, or have endorsements that change this treatment, so it’s important to read the policy language.