Most liability insurance contracts treat defense expenses asoutside the policy limit. Such is not the case indefense-within-limits (DWL) policies, though. Detractors call themwasting, cannibalizing or self-liquidating policies since defensefees can consume the policy limit. DWL policies appear prominentlyin D&O coverage, legal and medical malpractice policies and nowin some commercial general liability policies.

Defense-within-limits policies are attractive to insurers andpolicyholders alike. For insurers, capping the company'sresponsibility for legal fees is appealing. Instead of fundingunlimited defense fees, an insurer knows that on a $1 millionpolicy, it will pay no more than $1 million in legal fees andsettlement payments, max.

Such policies also give policyholders financial responsibilityregarding legal cost management. Policyholders who might desire agold-plated defense, lobbying insurers to hire off-panel counsel at$600/hour, may forego such demands when they realize that everydollar spent on lawyers is one less dollar available for settlingclaims.