Defence costs (insurance)
Defence costs are legal and expert witness costs in an insurance claim. Critical PI question: are defence costs inside the limit (reduces payout) or outside it.
Ask Chalkline about this →Defence costs in an insurance policy are the legal representation, expert witness, court filing, and incidental costs incurred defending a claim against the insured. For builders, defence costs commonly arise on professional indemnity (PI), public liability, and management liability policies. The single most important policy term to understand is whether the defence costs sit inside or outside the limit of indemnity (verified per insurance industry practice 2026-05-16).
Inside-the-limit vs outside-the-limit (the crucial distinction):
| Policy structure | What it means | Example |
|---|---|---|
| Inside the limit (sometimes “Defence Costs in addition to Limit excluded”) | Legal costs come out of the policy limit, reducing what’s left for damages | $1M limit, $300k defence costs → $700k for damages |
| Outside the limit (“Defence Costs in addition to Limit”) | Legal costs paid separately by insurer; full limit available for damages | $1M limit, $300k defence costs → $1M for damages |
Worked example: PI claim defended:
Imagine a $750k contested PI claim against a builder. Both policies have a $1M limit and similar premium:
| Policy A: Defence inside | Policy B: Defence outside |
|---|---|
| Insurer pays $250k legal + expert costs | Insurer pays $250k legal + expert costs |
| Insurer can pay $750k damages from $1M − $250k = $750k available | Insurer can pay $750k damages from $1M available (defence separate) |
| Insurer’s max liability is $1M total | Insurer’s max liability is $1M + $250k = $1.25M total |
If the claim is settled at $850k:
| Policy A | Policy B |
|---|---|
| $1M limit − $250k defence = $750k available | $1M limit available |
| Insurer pays $750k of the $850k | Insurer pays $850k |
| Builder pays remaining $100k | Builder pays $0 |
This is why “defence costs outside the limit” is the standard recommendation for PI insurance, and worth paying for in premium.
Typical defence cost magnitudes (residential construction):
| Claim type | Typical defence costs (ex-GST) |
|---|---|
| Public liability slip-and-fall | $30k-$60k |
| PI design dispute (cosmetic/scope) | $40k-$80k |
| PI design dispute (structural/serious) | $80k-$200k |
| Major defect claim (foundation, structural) | $150k-$400k |
| Class action (uncommon residential) | $500k+ |
| Workplace fatality (criminal + civil) | $200k-$800k |
(Australian legal costs 2026; senior counsel rates $10-15k/day, junior counsel $4-8k/day, expert witnesses $400-$1500/hour, instructing solicitor at $400-$800/hour.)
What defence costs include:
| Component | Typical share |
|---|---|
| Solicitor fees (instructing law firm) | 30-40% |
| Counsel fees (barristers at hearing/mediation) | 25-35% |
| Expert witness fees (engineers, surveyors, valuers) | 15-25% |
| Court filing, discovery, transcripts | 5-10% |
| Settlement negotiation costs | 5-10% |
| Investigator and adjuster (early) | 5-10% |
Insurer’s right to settle (the “panel insurer” issue):
Most policies give the insurer the right to direct the defence and to settle the claim. This means:
- The insurer chooses the law firm from its panel.
- The insurer can settle the claim without the insured’s full consent (subject to a “consent-not-unreasonably-withheld” clause in some policies).
- The insured cannot direct the case if doing so would increase the insurer’s exposure.
A builder who wants their own preferred solicitor must accept that the insurer may not pay for that solicitor under the policy. Some premium PI policies allow “policy holder’s choice of lawyers within the panel”.
Common defects in policy understanding:
- Believing defence is always free: defence is paid only if the claim is covered by the policy. Uncovered claims (e.g. fraud, willful misconduct) are at the insured’s expense.
- Failing to notify the insurer promptly: most policies require notification “as soon as practicable”; late notification can void cover and shift defence costs to the insured.
- Speaking to the claimant directly: many policies require all communication via the insurer/solicitor. Direct contact can be deemed an admission of liability.
- Settling the claim privately: the insurer may decline to pay the settlement if not approved in advance.
- Defence costs inside-the-limit policy chosen for cheaper premium: short-term saving, long-term risk.
Builder takeaway:
- Always check whether defence costs are “in addition to the limit” (outside) or “within the limit” (inside) on every renewal.
- Premium difference between the two is typically 10-20%; the protection difference can be hundreds of thousands of dollars.
- Brief the broker explicitly: “PI cover with defence costs outside the limit, minimum $1M aggregate”.
- Notify the insurer of any incident or letter of demand within 7 days.
- Don’t communicate with the claimant directly once a claim is on foot; defer to insurer’s appointed solicitor.
Also known as: legal costs (loose); defence and supplementary payments; loss adjustment expenses (US term); coverage costs.
Category: Insurance.
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Last updated: 2026-05-16. Verified: 2026-05-16. Quarterly review for currency.