1. Excess insurance policies do not cover defense costs. For this reason, the cost for excess coverage is cheaper than primary coverage. I should say usually excess policies do not cover defense costs. Nothing is absolute. However courts across all jurisdictions have consistently upheld an insurance company’s denial of defense costs under the express terms of the policy contract. See, e.g. Cornhusker Agr. Ass’n, Inc. v. Equitable Gen. Ins. Co., 223 Neb. 618, 627, 392 N.W.2d 366, 372 (1986) (excess insurer had no duty to defend because it expressly limited such obligation in the terms of its policy with insured).
2. Umbrella policies typically do pay defense costs. The amount covered depends upon whether the loss is triggered on a “direct” or on an “excess” basis. A “direct” basis means that defends costs are treated the same as dictated in the terms of the primary policy. An “excess” basis means that defense costs are to be considered part of the insured’s ultimate net loss. This is defined in the policy as the total amount of sums which an insured (or its primary insurance) must pay. This can include defense costs. However courts generally apply this duty equitably and it is often not triggered until the primary insurer has paid and exhausted its limits in handling the claim. See, e.g. 14 Couch on Insurance 2d 51:36 at 446 (the majority view is that an excess liability carrier is not obligated to participate in the defense until primary policy limits are exhausted). See also Nordby v. Atlantic Mutual Ins. Co., 329 N.W.2d 820 (Minn. 1983).
3. The excess carrier must participate in the defense and share costs “when it is clear that the potential judgment against the insured may be substantially greater than the amount of the primary policy limits.” 14 Couch on Insurance 2d, 51:36 at 446. See e.g. U.S. Fid. & Guar. Co. v. Federated Rural Elec. Ins. Corp., 37 P.3d 828, 835 (Ok. 2001) (under Oklahoma law, an excess insurer is not obligated to bear liability for the costs of defense until the primary policy is exhausted).