Also known as: defense expenses · cost of defense · claims expenses
Defense costs are the attorney fees, court costs, expert fees, and related expenses an insurer pays to defend you against a covered claim.
Defense costs are what your insurer spends to fight a covered claim on your behalf, including defense attorney fees, court costs, expert witness fees, and similar litigation expenses, as distinct from any settlement or judgment paid to the claimant. The critical structural point for a startup is how these costs interact with your policy limit. Under many claims-made D&O and E&O policies, defense costs are paid inside the limit, meaning every dollar spent on lawyers erodes the same limit you have left for a settlement. Under most general liability policies, defense costs are paid outside the limit, in addition to it, so legal fees do not shrink the money available to resolve the claim. Note that this inside-versus-outside question is separate from whether the policy is duty-to-defend or pay-on-behalf, which governs who controls and advances the defense rather than whether those costs consume your limit.
Defense costs are the expenses an insurer pays to defend you against a covered claim, such as defense attorney fees, court filing costs, and expert witness fees. They are separate from the settlement or judgment paid to the person bringing the claim. Depending on your policy, these costs are either paid inside your limit, reducing what is left for a settlement, or outside it, in addition to your limit.
It depends on how your policy is written. Many claims-made D&O and E&O policies pay defense costs inside the limit, so legal fees erode the same limit available for a settlement, an arrangement sometimes called eroding or wasting limits. Most general liability policies pay defense costs outside the limit, in addition to it, so a legal fight does not shrink your coverage. Confirm this detail with your broker, because it materially affects how much protection you really have.
For startup D&O and E&O, defense costs are commonly paid inside the limit, meaning they reduce the amount available for a settlement. This is why the headline limit alone does not tell you how much coverage you truly have, since a heavy defense can consume much of it before any settlement. Ask your broker to show you how each policy treats defense costs so you can compare quotes accurately.
Definitions are educational and may be modified by your specific policy language, endorsements, and state rules. For regulatory guidance, refer to the California Department of Insurance or the NAIC.
Last updated: July 2026.