If your policy pays defense costs “outside” the limits of liability then your defense costs do not erode the limits of liability of your policy. As an example – if your policy limits are $1 million per occurrence and $3 million aggregate and your defense costs for a case are $100,000, you would still have $1 million to cover a potential award for that claim. If your policy pays defense costs “inside” the limits of liability then you would have only $900,000 left to cover a potential award in the previous example. Clearly – it is preferable to purchase a policy with defense costs “outside” the limits of liability.