Have a case with 100k policy limit. Policy says costs and fees come out of that limit. Can they do that?

Answer: Probably, so long as the policy is not a statutory policy so that applying the reduction for defense costs would provide less coverage than the statute requires.  The general rule is that if the coverage is not statutorily required, the parties are free to contract for whatever policy provisions they wish.  See: Frank v. Allstate, 1986 OK 42, 727 P.2d 577; Equity Mut. Ins. Co. v. Spring Valley Wholesale Nursery, Inc., 1987 OK 121, 747 P.2d 947.