Defense-within-Limits policies encourage insurers and policyholders to keep an eye on expenses to ensure a best-case outcome.

Most liability insurance contracts treat defense expenses as outside the policy limit. Such is not the case in defense-within-limits (DWL) policies, though. Detractors call them wasting, cannibalizing or self-liquidating policies since defense fees can consume the policy limit. DWL policies appear prominently in D&O coverage, legal and medical malpractice policies and now in some commercial general liability policies.

Defense-within-limits policies are attractive to insurers and policyholders alike. For insurers, capping the company’s responsibility for legal fees is appealing. Instead of funding unlimited defense fees, an insurer knows that on a $1 million policy, it will pay no more than $1 million in legal fees and settlement payments, max.

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