When reviewing your Massachusetts business’ current general liability insurance policy or comparing potential new policies, it’s essential that you understand the various terms used in the policies. Without understanding the terms used, it’s impossible to fully appreciate the protections a policy provides. There are lots of terms to learn about, but two particularly important ones are “aggregate limits” and “per-occurrence limits”. Here’s a look at what each of these is.
Limits Determine General Liability Insurance Policies’ Maximum Payouts
In insurance policies, the term “limits” is usually used in a fairly straightforward manner. Limits generally determine the maximum amount a policy will pay for a valid claim. After a claim meets a policy’s deductible, the policy will normally pay until it’s limit is reached. After that point, the policy typically won’t provide additional protection.
For example, assume your business has a general liability insurance policy that has a $10,000 deductible and a limit of $1 million. If your business has a valid claim, you can likely expect the payout to go as follows:
Your business will cover the first $10,000 of the claim, until the deductible is met
The general liability coverage will cover the next $990,000, until the $1 million limit is met
Any amount beyond $1 million will need to be covered by your business or a supplemental liability policy
Aggregate Limits and Per-Occurrence Limits Define Different Maximums
It’s common for a general liability policy to have several limits within it. Rather than having just a single limit, different coverages may have different limits. Additionally, any one coverage [or the overall policy] may have two limits -- a per-occurrence limit and an aggregate limit.
Per-occurrence limits and aggregate limits both define maximum payouts, but they do so in different settings. Per-occurrence limits define how much a policy will pay for any one incident or claim. Aggregate limits define how much a policy will pay over the policy’s duration. [Most general liability policies have durations of 6 months or 1 year.]
To see how these limits interact with each other, assume your business’ general liability coverage has a per-occurrence limit of $400,000 and an aggregate limit of $1 million. Also assume your business had three separate claims over the course of a year [the policy’s duration]. The first claim was for $300,000, the second was for $600,000, and the third was for $400,000.
Here’s how the policy would likely cover these claims in this scenario:
The first claim would probably be fully covered, since it’s less than the per-occurrence limit and the aggregate limit hasn’t yet been reached. After this claim, your business would have used $300,000 of the $1 million aggregate limit.
Your business’ second claim would probably be covered for $400,000, which is the per-occurrence limit. Your business would be responsible for the claim’s remaining $200,000 that exceeds the per-occurrence limit, and after this claim was paid your business would have used $700,000 of the $1 million aggregate limit.
Your business’ third claim would probably be covered for $300,000. Even though it doesn’t exceed the per-occurrence limit, there’s only $300,000 left before the aggregate limit is reached at this point. Your business would probably be responsible for the claim’s remaining $100,000.
[In all these situations, your business would still likely have to pay the general liability coverage’s deductible for each claim.]
Selecting the Right Limits for Your Massachusetts Business
Obviously, both aggregate limits and per-occurrence limits have a significant effect on how much protection a general liability insurance policy provides. To get help selecting limits that will meet your Massachusetts business’ needs, contact an experienced Garrity Insurance agent who can help you review and compare general liability policies when you’re looking for a new one.
The general aggregate is the maximum amount of money a liability insurance policy will pay in a given policy term.
Unlike a per-occurrence limit, which limits the amount per claim, a general aggregate limit can be exhausted through either two claims, fifty claims, or anywhere in between.
We know that general aggregates can be confusing, especially for certain niche insurance policies or insurance requirements that you might face. That is why we’ve put together this guide.
Here is just about everything you need to know:
How does the general aggregate work?
Take a look at the illustration below. Let’s assume you have the traditional general liability insurance policy of $1,000,000 per occurrence and a $2,000,000 general aggregate.
Imagine that each smaller bucket is each claim [or an "occurrence," as your policy states]. Each of the smaller "per occurrence" buckets can fit $1,000,000 worth of liability in a single claim.
The big bucket represents your general aggregate limit, which is the maximum the insurance company will pay for regardless of claim quantity. The big bucket can fit up to $2,000,000 worth of liability, regardless of the number of claims.
As a liability claim happens, it will begin to fill up a small bucket. Once the small bucket is filled, it will get dumped into the larger bucket [the aggregate bucket].
This way, no single "per occurrence" bucket can completely fill up the aggregate bucket. You would need a minimum of two full occurrence buckets!
Why is the general aggregate important?
Without going any further into the metaphor, the general aggregate is very important to your business. If you have a worst-case scenario claim, you will still have insurance after that claim occurs, because one claim won’t wipe out your entire insurance policy.
Additionally, it makes insurance more affordable since you and the insurance company will agree on the maximum amount that insurance policy will pay out. After all, you can always purchase a higher limit.
What insurance policies do not have an aggregate limit?
Not every insurance policy has an aggregate limit. If a policy is required by the government, for example, it likely doesn’t have an aggregate limit.
Here are some the policies we are talking about:
Auto Insurance
Auto liability insurance is not subject to aggregate limits like a general liability policy. Since everyone who drives is required by law to have auto insurance, it does not make sense to have a general aggregate limit. You would have drivers on the road who are ostensibly insured but who have exhausted their policy!
Workers Compensation
If you are an employer, chances are you are required by state law to carry workers compensation insurance to pay for employee injuries that happen while they’re on the job.
It is an employee's right to a reasonably safe working environment and to have their medical bills paid if they are injured on the job.
It is not the employee's fault if the employer has had some bad claims that year and their workers compensation policy is capped out. By law, the employer still needs to pay what is owed to the employee.
Excess Liability And The General Aggregate
Even if a policy has an aggregate limit, there is a way to increase the maximum amount of money that the insurance company is obligated to pay out.
With an excess liability policy, you can increase not only your "per occurrence" limit, but also your general aggregate limit.
Here’s how it works:
As you can see, the excess policy sits on top of both the occurrence and the aggregate limit to increase both.
A $5,000,000 excess liability policy results in $6,000,000 for any one occurrence and $7,000,000 aggregate.
What is a per-project aggregate?
This is a common requirement for certain type of businesses, usually in the construction industry. In fact, it’s so common that we thought we needed to mention it in this post.
As explained above, the general aggregate gets eroded every time you file a claim. If you have a lot of claims, you may run out of insurance limits.
Since construction projects can be prone to claims and damages, certain construction jobs require that you have a dedicated aggregate limit set aside for that job.
This ensures that even if you max out your policy with claims and the project owner needs to file a claim against your insurance, they have their own dedicated limits to collect against..
Since you are essentially buying additional limits, this endorsement will usually result in an additional premium.
Common Issues With The General Aggregate
Non-Concurrent Effective Dates
You may face problems if you purchase additional limits of liability on an excess insurance policy and the underlying policies don't all have the same policy effective dates.
You could have a situation where the general aggregate is reinstated on the primary liability policy but not on the umbrella, or vice-versa.
Having non-concurrent effective dates isn't always a problem, but make sure you discuss it with your insurance broker.
Insurance Requirements
We have seen some insurance requirements that require uncommon aggregate limits. For example, the majority of insurance policies are $1,000,000 per occurrence and $2,000,000 general aggregate.
A contract that requires $2,000,000 per occurrence and $5,000,000 general aggregate is awkward, since a $1 million excess liability policy would only meet the occurrence requirement, but a $3 million excess liability policy might feel like you are purchasing too much insurance.
If this sounds like you, it’s time to have a discussion with your insurance broker! Underwriters can get creative in these situations. They may offer increased aggregate limits on the primary liability policy so you don't have to purchase a full $3 million excess.
Too Many Additional Insureds
Companies are quick to hand out the “additional insured” status on their insurance policy to win jobs and get business. The problem: now your insurance policy is not just providing indemnification for you, it is insuring 200 other businesses, too. This could create a situation where you need much higher limits so there is enough money to cover all the parties your insurance company is defending.
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Summary
The general aggregate limit plays a critical role in how liability insurance policies function. If you need additional limits, you can take steps like purchasing an excess liability insurance policy or even getting a project aggregate limit.
Regardless, if you are looking to help to review your aggregate limits or need assistance meeting certain insurance requirements, let us know!