A Commercial General Liability (CGL) policy is a cornerstone of risk management for many businesses. It provides coverage for various liability risks, including bodily injury, property damage, and personal injury. One critical aspect of CGL insurance is the coverage for defense costs. 
What are Defense Costs?
Defense costs are legal expenses incurred by the insured in defending a lawsuit or claim covered by the policy. These costs can include attorney fees, court costs, expert witness fees, and other related expenses.
Defense Costs Inside or Outside the Limit of Liability?
The way defense costs are treated within a CGL policy can significantly impact the overall coverage. There are two primary approaches:
- Inside the Limit of Liability:
- How it works: Defense costs are deducted from the policy's overall limit of liability. This means that once the defense costs have consumed a portion of the limit, the amount available to compensate the injured party is reduced.
- Implications: In high-cost litigation, this approach can quickly erode the policy's limit, leaving the insured exposed to significant financial risk.
- Outside the Limit of Liability:
- How it works: Defense costs are paid separately from the limit of liability. This means that the policy's limit is solely reserved for compensating the injured party.
- Implications: This approach provides more protection for the insured, as the defense costs do not reduce the amount available to settle or pay a judgment.
The Importance of Understanding Coverage
It is crucial to understand how defense costs are handled in your CGL policy. When reviewing your policy, pay close attention to the specific language and provisions related to defense costs.