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⚖️ '''Litigation cost''' refers to the aggregate expenses an [[Definition:Insurance carrier | insurance carrier]] or [[Definition:Self-insured retention (SIR) | self-insured entity]] incurs in the legal defense and resolution of a [[Definition:Claim | claim]], encompassing attorney fees, court filing fees, expert witness charges, discovery expenses, depositions, and related administrative outlays. In insurance accounting, litigation costs are a major component of [[Definition:Loss adjustment expense (LAE) | loss adjustment expenses]] and are tracked separately from [[Definition:Indemnity | indemnity payments]] because they directly influence [[Definition:Combined ratio | combined ratios]], [[Definition:Reserve | reserve]] adequacy, and overall [[Definition:Underwriting profit | underwriting profitability]]. The distinction between [[Definition:Allocated loss adjustment expense (ALAE) | allocated loss adjustment expenses]] — costs tied to a specific claim — and [[Definition:Unallocated loss adjustment expense (ULAE) | unallocated loss adjustment expenses]] is critical for accurate financial reporting.

💼 Carriers manage litigation costs through a combination of panel counsel arrangements, [[Definition:Litigation management guidelines | litigation management guidelines]], billing audits, and increasingly through [[Definition:Legal technology | legal technology]] platforms that monitor matter budgets in real time. When a claim enters suit, the assigned [[Definition:Claims adjuster | claims adjuster]] or [[Definition:Claims examiner | claims examiner]] works alongside defense counsel to set a litigation budget, track milestone events, and evaluate whether early [[Definition:Settlement | settlement]] or [[Definition:Alternative dispute resolution (ADR) | alternative dispute resolution]] would be more cost-effective than proceeding to trial. In lines such as [[Definition:Directors and officers liability insurance (D&O) | directors and officers liability]] or [[Definition:Professional liability insurance | professional liability]], litigation costs can rival or even exceed the indemnity payment itself, making cost containment a strategic priority.

📈 The ability to forecast and control litigation costs has become a defining competency for insurers operating in high-severity lines. [[Definition:Actuarial analysis | Actuarial teams]] incorporate litigation cost trends into their [[Definition:Pricing model | pricing models]], while [[Definition:Reinsurance | reinsurers]] scrutinize cedants' litigation management practices during [[Definition:Treaty reinsurance | treaty]] renewals. In an era of [[Definition:Social inflation | social inflation]] and expanding [[Definition:Litigation funding | third-party litigation funding]], defense expenditures are climbing across many [[Definition:Line of business | lines of business]]. Insurers that invest in disciplined cost oversight — through data analytics, early case assessment, and rigorous vendor management — gain a measurable edge in both reserving accuracy and competitive [[Definition:Premium | pricing]].

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Loss adjustment expense (LAE)]]
* [[Definition:Allocated loss adjustment expense (ALAE)]]
* [[Definition:Social inflation]]
* [[Definition:Litigation management guidelines]]
* [[Definition:Alternative dispute resolution (ADR)]]
* [[Definition:Combined ratio]]
{{Div col end}}

Definition:Litigation cost - Revision history

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