Ask the Underwriter: I do not understand what “inside” versus “outside” means on my quote. Can you explain the difference?

We have received several calls recently with this very question, so it is worth using this month’s column to explain what those terms mean.

“Inside” and “outside” refer to how the costs of defending a claim—commonly called defense costs—are treated under the policy.

With inside defense costs, the expenses incurred in defending a claim are paid from, and therefore reduce, the policy’s limit of liability.

For example, assume you have a policy with limits of $100,000 per claim/$300,000 aggregate and defense costs are inside the limit. If a claim is made and $25,000 is spent defending it, those defense costs reduce the $100,000 per-claim limit. That means only $75,000 would remain available to pay a settlement or judgment arising from that claim.

With outside defense costs, additional coverage is available to pay defense expenses without reducing the policy’s limit of liability.

We provide this additional protection through our Supplemental Defense Coverage Endorsement. The endorsement provides an additional amount for defense costs outside the limit of liability, up to the lesser of 50% of the per-claim limit or $500,000.

Using the same example, a policy with limits of $100,000 per claim/$300,000 aggregate and the Supplemental Defense Coverage Endorsement would provide up to an additional $50,000 for covered defense costs during the policy period. If $25,000 were spent defending the claim, those costs would be paid from the supplemental defense amount rather than reducing the $100,000 per-claim limit. The full $100,000 would therefore remain available to pay a covered settlement or judgment.

Another question we frequently receive is: Do I have to add the “inside” and “outside” premiums together to purchase Supplemental Defense Coverage?

No.

If your quote shows both an inside and an outside option, the premium shown for the outside option is the total premium for the policy with Supplemental Defense Coverage included. You do not add the two premiums together.

Supplemental Defense Coverage can be a cost-effective way to help preserve your policy limits when a claim occurs. Defense costs can add up quickly, and keeping those expenses from eroding the amount available to resolve the claim can provide valuable additional protection.

If you have questions about the coverage—or would like to compare the inside and outside options on your quote—please call or email me. I would be happy to walk through the differences with you.