Aggregate limit of liability 101
Aggregate limit of liability is one of the most important limits placed on coverage but what is it? We break it down to help you find the best insurance policy for your business.
A business’s daily operation involves all sorts of risky decisions. While it’s often safe to minimize risk, doing so can also minimize possible rewards. That’s not to say you should jump at every risky opportunity—it’s just that you shouldn’t be overly risk-averse.
One part of running a successful business is identifying smarter risks, such as ones unlikely to harm you or ones you know you can recover from, and then taking them.
Should anything go wrong, that’s where the benefit of insurance comes in. Insurance providers measure your risks and offer you coverage to help you recover when you face them. That coverage has all kinds of conditions and limits that you agree to when you purchase the liability policy. And one of the most important limits placed on coverage is what’s called the aggregate limit of liability.
So, what is an aggregate limit of liability, exactly?
Aggregate limit of liability explained
Limits of liability apply to coverage for third-party claims and lawsuits against your business. The aggregate limit of liability is the maximum total amount your insurer will pay out for all such claims over the course of your policy term. It is a cumulative total, combining the sum of all payouts for all individual claims.
Think of it as the ceiling on coverage you can get over the duration of your policy term. If many things go wrong, and you need a lot of help multiple times, the aggregate limit is the maximum amount of assistance you can count on.
Let’s say that you have an aggregate limit of $100,000 for a year-long small business insurance policy. If that’s the case, then:
- The total amount of coverage you can have paid out, combining any and all claims you make over the year, would not exceed $100 thousand.
- Any losses over your $100 thousand aggregate limit will have to be paid out of pocket, instead.
In addition to the aggregate limit of liability, there are also limits on individual claims.
A per-claim limit, also known as an occurrence limit, is the maximum amount that your insurer will pay out for an individual claim. These limits are lower than aggregate limits, and they are overridden (not paid out) if the aggregate limit has been reached.
In sum, a per-claim limit is a cap on coverage you get each time you make a claim throughout the duration of your policy.
For example, let’s say that your insurance policy includes a per-claim limit of $10 thousand. If that’s the case, then:
- If you get sued for $10,000, you could be covered in full for the payout.
- If you got sued for $15,000, you could only be covered for $10,000 and would need to pay the additional $5,000 out of pocket.
Let’s take a deeper look at how these limits work in practice.
How do aggregate limits work?
To further understand how these limits work on their own (and in combination with each other), let’s look at detailed scenarios similar to what business owners could find themselves in.
Say your policy has:
- An aggregate limit of liability of $1 million
- A per-claim limit of $100,000
- A term limit of one year, from January 2019 through December 2019
With that in mind, consider these situations as a business owner:
Scenario 1 – You are sued for $100,000 once per month between January and October of 2019, for a total of $1 million dollars.
- Each individual instance is covered completely, and none goes over the per-claim limit.
- All instances are covered, since their cumulative total doesn’t go over your aggregate limit.
- But now you’ve reached your aggregate limit for the year and would have to pay out of pocket for any claims in November and December, regardless of their size.
- Assuming no further lawsuits occur, you will have paid no out of pocket expenses—besides your premium—even though you were sued for $1 million.
Scenario 2 – You are sued for $500,000 in February 2019, then again for $600,000 in June 2019.
- For each claim, $100,000 is covered, so you would owe $400,000and $500,000 out of pocket, respectively.
- However, only $200,000 of your aggregate limit has been paid, so future claims within the term will be covered up to $100,000 each and $800,000 total.
- Half-way through your term, you will have paid $900,000 out of pocket, in addition to your premium, after being sued for $1.1 million.
Scenario 3 – Building on scenario 2, after the $1.1 million in total lawsuits you faced between February and July, you face an additional 80 smaller lawsuits between July and December, for $10,000 each, totaling $800,000.
- Each and every claim from July on is covered completely, since none exceeds the $100,000 per-claim limit, and the total is still within your aggregate limit.
- You would have maxed out your aggregate limit over its term and paid an additional $900,000 out of pocket, all after having been sued for a total of $1.9 million over the year.
All things considered,
- Scenario 1 is the best for you, the insured: you pay the least out-of-pocket for the most possible coverage.
- Scenario 2 is the worst: you pay a lot out of pocket and are still liable.
- Scenario 3 is something of a middle ground between the best and worst cases: you do pay a lot out of pocket, but ultimately it could have been much worse.
As you can see, the specific size and timing of individual claims can impact the amount of coverage you need and use, as well as how much you pay out of pocket.
Looking at scenarios 2 and 3 in particular, you see how limits interact to protect your insurance company, but can also be helpful for you as an insured business owner.
Why do aggregate and per-claim limits exist?
For insurance providers, the main reason limits exist is to protect them from huge coverage payouts. For instance, these limits:
- Protect against unexpectedly large individual payouts
- Safeguard against payments insurers can’t afford
- Disincentivize fraud and abuse
For policyholders, though, these limits also have benefits. Any kind of limit on coverage sets a maximum that the insured can expect to receive because the insurer can and must be able to cover it.
Limits can also help you customize your plan to your needs.
Since higher limits are usually associated with higher premiums, you may be able to negotiate a more affordable premium in exchange for a lower limit. This goes for both the aggregate and per-claim limits:
- If you know you’re unlikely to face individual high-stakes lawsuits, you might opt for lower per-claim limits, irrespective of the aggregate claim.
- If your overall risk is low, you can aim for a lower aggregate, regardless of what your per-claim limits are.
Understanding your limits is one easy way to help customize your insurance to suit your needs.
Understand your limits—optimize your coverage
Your aggregate limit relates not just to a dollar amount, but also an amount of time. Traditional terms are often long, with 1 year as a standard, and a lot can happen unexpectedly over such a long period of time. So, a year-long term is a limit in itself.
That’s why Thimble is revolutionizing insurance coverage with flexible, customizable terms. We can connect you with general liability and professional liability insurance that works when you do, with coverage by the hour, day, or month.
By understanding what per-claim and aggregate limits can mean for your business and your policy, you can negotiate for just the right amount of coverage. If you’re in a relatively risky line of work, a higher limit might be worth the more expensive premium. Or, if your business faces fewer or less substantial risks, you could opt for a more affordable premium and lower limits.
Understanding these limits can also help you avoid breaching them after you’ve negotiated and purchased a policy. As you plan and execute decisions, knowing the limits of how much coverage you can count on can help you assess and take on risks more thoroughly and confidently.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.