Defense Costs

What Does Defense Costs Mean?

Defense costs refer to all expenses incurred in defending against a lawsuit. These costs include hiring a lawyer, court fees, investigations, fact-gathering, filing legal paperwork, and other related expenses. In the context of insurance, various liability policies typically cover these costs. This covers auto and homeowners liability claims as well as business coverages like general liability insurance, which responds when a customer or third party sues a company.

Insuranceopedia Explains Defense Costs

A liability insurance policy may provide defense cost coverage in one of two ways: it can either be included within the liability limit or offered as a separate limit.

For example, consider policies A and B, both offering liability limits of $100,000. However, policy B covers defense costs separately. In the event of a lawsuit where the policyholder owes $125,000 total—$100,000 in damages and $25,000 in defense costs—policy A would only cover $100,000, leaving the policyholder responsible for the remaining $25,000. In contrast, policy B would cover the full $100,000 in damages and the defense costs up to its coverage limits.

The example is also why buyers often reconsider how much liability insurance they actually need before picking the minimum required limits. Businesses with higher exposure sometimes add a commercial umbrella policy on top of their primary coverage, so a drawn-out lawsuit does not eat through the limits available to pay the actual judgment.