Liability insurance protects businesses and professionals when problems occur, but the coverage provided is subject to various conditions and limits, including a limit or cap on the total amount of money the insurer will pay for any and all claims made and reported during a given policy period. In this bulletin, we explain such "aggregate limits" and their usefulness in customizing insurance coverage based on a company's risk exposure and budget. We focus here on claims-made-and-reported policies commonly issued to professionals, but aggregate limits apply in the general liability context as well.
What is an aggregate limit of liability?
- Liability policies, including Professional Liability/E&O policies, include certain limits on the coverage(s) available for third-party claims (including lawsuits) made against an insured during a given policy term (usually one year).
- Distinct from a per-claim limit, which states the amount an insurer will pay for each individual claim made during the policy period, the aggregate limit is the maximum amount an insurer will pay for all such claims made against the insured during the policy period, no matter how many separate claims might be made.
- Unless otherwise specified in the policy or on the "declarations" page, all valid claims covered under the liability policy count towards the aggregate limit, including claims made against additional insureds.
- The aggregate limit applies to both indemnity payments and defense costs incurred on the insured's behalf. When the cumulative sum of all the payments an insurer has made during a single policy period exceeds the aggregate limit, the policy's coverage is exhausted. This means the insurer is relieved of its duty to defend the insured (or any additional insured) in any ongoing or subsequent litigation, and the insured must pay any outstanding damages or claims expenses out of pocket.
- If/when a policy is renewed, the aggregate limit balance also refreshes or renews, consistent with the agreed renewal terms.
Why are aggregate limits useful?
- Insurers use aggregate limits to protect themselves from unexpectedly large individual payouts, allowing them to keep premiums affordable for all customers.
- For insureds, aggregate limits can serve as tools for customizing their insurance coverage to appropriately reflect their risk exposure and available budget.
- If an insured faces modest risk exposure and has a limited budget, purchasing a policy with a lower aggregate limit may provide sufficient protection, while keeping the policy's premiums lower and more affordable. Alternatively, if the insured has more substantial risks and a larger budget, the insured can increase its limits to provide greater safety for a higher premium.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.