What is an Aggregate Limit in a Liability Policy?
In many liability insurance policy forms, you will see the word aggregate limit and wonder what that really means.
Let’s break it down.
To start, let’s look at the commercial general liability policy or GL policy. If you look at a policy or get a certificate of liability insurance from someone, you’ll see many limits of coverage. The most important one is the Each Occurrence limit. Typically this will be $1,000,000, and this the maximum the policy will pay for anyone claim or occurrence.
The second most important limit on the policy or certificate is the General Aggregate, a general liability policy that will typically be two times the occurrence limit, or in this example, $2,000,000. The General Aggregate is the most the policy will pay for ALL claims during any one policy term, usually 12 months.
As an example, if you had three claims in any one policy term that paid out $1,000,0000 each, the first two claims would be covered, but they would exhaust or deplete the policy because you reached your aggregate for the year, and the third $1M claim would not be covered.
If you’re a business owner and purchase liability insurance. Someone asks you what your limits of liability are; the common answer will be what your occurrence limits of coverage are, not your aggregate limits are.
Now, when you’re talking about D&O or Directors and Officers Liability, E&O, Employment Practice Liability insurance, Cyber, and other management and professional policies, it is more common to see that the aggregate limit is the same the per claim limit of coverage.
In management and professional insurance, it is not called an occurrence limit but a per claim limit.
Now, there are always exceptions to rules. In management or professional policy, you may see an aggregate limit higher than the per claim limit, or you may see additional limits for defense, refreshed side-a protection limits, and other twists.
These variations can make evaluating different policies at renewal time difficult, so an expert may be needed to explain the nuances of these issues.
Couple of final points when discussing aggregates and per claim, or per occurrence limits.
In general liability insurance written on an occurrence form, defense costs are usually not placed “inside” the limit of liability. In other words, defense costs are unlimited.
On the other hand, though, in management and professional policies, which are usually written on a claims-made policy form, the defense costs are usually contained within the per claim and aggregate limits. Meaning that every dollar spent on defense erodes or reduces the limit of liability left to pay for settlements.
This fact means that you need to evaluate the limits of coverage you purchase carefully.
Here’s why – let’s say you are faced with a tough Directors & Officers or D&O claim. Your attorney tells you upfront that to defend against this particular action will cost at least $250,000 in legal fees, which your insurance company will consent to – that’s the good news. The bad news is that if you lose the case after spending the $250,000, you’ll only have $750,000 left in a $1M D&O policy to settle the action. If the judge awards more than that, you’re out of luck.
This is why a $1m policy limit may not be enough. I recommend reviewing options for limits higher than $1M when making a buying and renewal decision so that you can determine your budget and comfort levels.
On general liability, we always recommend purchasing an umbrella or excess liability coverage to provide higher protection limits, which is usually pretty affordable.