Your commercial insurance policy has “aggregate limits” on how much the insurance company will pay during the policy’s term. If you suffer multiple calamities in a short time, you could run out of coverage.

Aggregate limits apply to any insurance policies you have. Understanding the risks involved in your operations and how long you could be held liable for them is essential. An online business may worry less about bodily injury risks than, say, a restaurant would, but more about defamation and media liability lawsuits. You’ll need limits and aggregate limits that serve your risk exposures.

What’s the difference between an aggregate limit and a policy limit?

A policy limit is the maximum amount the insurance company will pay for a single claim. It’s called the “per occurrence” limit.

An aggregate limit is the maximum your insurance company will pay for all losses during a single policy term. It’s also called the “lifetime limit” for your policy term. Every time you renew your policy, your aggregate limits reset.

How aggregates are calculated

Calculating an aggregate limit depends on your business’s risk rating. Insurance companies use your risk management practices and claims history to price your policy. This affects how much coverage you can buy and for what price. If you have a lot of claims and a flawed risk profile, you’ll pay more for coverage.

You can buy higher aggregate limits, but the price will depend on your business type and claims history.

Legal fees and limits

Legal fees come out of your aggregate limits. The more time you spend in court, the more your aggregate is drained. This is called “inside the limits” defense coverage. “Outside the limits” defense coverage means your defense costs don’t erode your policy limits.

Different types of aggregate limits

The general aggregate limit is the maximum your policy will pay for all covered losses. Here are some other types of aggregate limits:

• Products-completed operations aggregate. This limit applies to products or works that cause damage or injury after you’ve completed the project or sale.
• Per-project aggregate. If you undertake multiple projects yearly, a separate aggregate limit applies to each project. This affects occupations like engineers, architects and contractors.
• Per-location aggregate. If you have multiple locations, an individual aggregate limit on each location could help based on the operational risks at each location.

How aggregate limits affect coverage

Suppose you have a business owners policy (BOP) with a $1,000,000 aggregate limit. A BOP is a bundle of coverages most businesses use, including property, business interruption and general liability insurance.

• Property insurance covers damage to property, including buildings, equipment, inventory and furniture.
• Business interruption insurance replaces income if a business can’t operate because of damage caused by a covered event, like a fire.
• General liability insurance covers a company’s legal responsibility for the unintentional harm it causes customers. General liability harm includes bodily injury, property damage, and personal and advertising injury.

Your policy term is one year. All the claims you have within that year count against your aggregate limit.

How are multiple claims handled within the same policy term? Here are a few examples of what can go wrong in a year and how multiple claims can shrink your aggregate limit.

Claim No. 1: Property damage example

A fire damages your building and destroys some of your inventory and equipment. You file a claim. The insurance adjustor evaluates the damage at $410,000. You also file a claim for business interruption to replace your lost income. Business interruption helps with wage replacement and costs during the building’s restoration.

Your claim is within your coverage limits. You pay your $10,000 deductible. The insurance company pays your claim.

Here’s the cost breakdown:

• $410,000 is the damage estimate
• $10,000 is the amount you must pay toward your claim (aka your deductible)
• $400,000 is the remaining amount the insurance company pays you for damages

Your aggregate is reduced based on how much the insurance company pays:

• $1,000,000 is the policy term’s aggregate limit
• $400,000 is what the insurance company pays toward your claim
• $600,000 is your remaining aggregate limit ($1,000,000 minus $400,000 insurance payout)

Claim No. 2: Intellectual property infringement lawsuit

Four months later, you’re notified that you’re being sued for infringing on a patent of one of your products. To quickly end the lawsuit, you agree to a settlement. The legal fees and settlement amount to $206,000.

Your aggregate is reduced based on how much the insurance company pays:

• $600,000 is your current policy term aggregate limit
• $1,000 is the deductible you pay for your general liability claim
• $205,000 is the amount the insurance company pays toward your general liability claim ($206,000 minus your $1,000 deductible)
• $395,000 is your remaining aggregate limit ($600,000 minus $205,000 insurance payout) 

Claim No. 3: Property theft

Your new equipment arrives and structural repairs are completed. Your staff is eager to get back. You decide to reopen and work through the remaining renovations. Unfortunately, criminals took notice of your new equipment and furnishings. They break into your building and steal most of the electronics. They also damage the service entry door and security system.

The claims adjuster evaluates the damage at $105,000.

Your aggregate is reduced based on how much the insurance company pays:

• $395,000 is your current policy term aggregate limit
• $10,000 is the deductible you pay for your property claim
• $95,000 is the amount the insurance company pays toward your property claim ($105,000 minus your $10,000 deductible)
• $300,000 is your remaining aggregate limit ($395,000 minus $95,000 insurance payout)

Claim No. 4: Slip-and-fall incident

Undeterred, you’re able to get your equipment replaced quickly. Soon, it’s back to business as usual. 

It looks like you might get through the rest of the year without another catastrophe, until one day there’s a sudden rainstorm. You’ve had a lot of foot traffic, and the nonslip entryway mats are getting soaked.

Your staff replaces the wet mats with older, dry ones from the back room. They’re so focused on drying the entryway that they fail to see the tears in the older mats. A customer’s shoe catches on the torn fabric, causing them to fall and break a bone. It’s a complex break that results in multiple surgeries.

To make matters worse, the injured customer cares for their aging parent. The injury removes them from those duties, forcing them to hire a home health care service. They sue you for $1.5 million for medical costs, pain and suffering, and loss of services.

Your insurance company offers them $300,000, equivalent to the remainder of your aggregate limit. The customer refuses.

You now have a tough decision: You can face a lengthy legal battle with a jury that might sympathize with the injured customer and grant them the $1.5 million. Or, you can offer a settlement that exceeds what the insurance company will cover and pay the difference out of pocket.

Eventually, you offer $550,000. The injured customer accepts. Even though your policy aggregate resets to $1 million yearly, the lawsuit settlement applies to the year the claim was made.

Your aggregate is reduced based on how much the insurance company pays:

• $300,000 is your current policy term aggregate limit
• $1,000 is the deductible you pay for your general liability claim
• $300,000 is the amount the insurance company pays toward your property claim
• $0 is your remaining aggregate limit ($300,000 minus $300,000 insurance payout)

You pay $250,000 out of pocket ($550,000 minus $300,000 insurance payout; your $250,000 portion includes your $1,000 deductible).

Call your Rathbun Insurance account manager

Understanding how aggregates affect your coverage can help you make informed decisions about the protection you need. Talk to your Rathbun Insurance account manager about your business liability exposures. They can help you decide on aggregate limits and how to cover the gaps.