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Aggregate limits explained

By Higginbotham on November 12 , 2020

aggregate limits blog

Business insurance is one of the most integral parts of any modern organization. From natural disasters to job site injuries, theft and more, this crucial protection can spell the difference between success and failure. Most small business owners need business insurance because their personal assets are more closely aligned with their business assets.

Regardless of the industry the business serves, every small business owner should have some form of insurance, with many sectors requiring General Liability Coverage and Workers’ Compensation by law. As much as you’d like to think disaster could never strike your business, the likelihood of an unforeseen loss is too big to ignore. 

In the event of an emergency or an unfortunate turn, business insurance can significantly soften the impact and make recuperation much easier on the small business owner. If you are a small business owner who is unsure of the coverage that makes the most sense for your business, you should consider contacting a licensed insurance broker.  

Turning to the realm of enterprise-level businesses, most corporations need insurance to secure the future viability of their operations. Good commercial coverage can help protect a corporation from potentially debilitating financial damages from a lawsuit, often acting as the deciding factor on whether the lights stay on.

What is an Aggregate Limit?

Irrespective of the business it's designed for, every insurance policy includes a general aggregate limit. Defined as the maximum amount a carrier will pay an insured throughout a coverage period, an aggregate limit essentially sets the ceiling of protection your policy can provide. Any losses occurring outside this period are not eligible for a claim. While most insurance agents take this into account when planning your renewal, it's still important to stay on top of your term date as a small business owner to avoid a coverage gap.

Increasing Your Aggregate Limit

Each time an insurance policy is set for renewal, its aggregate limit is reevaluated and adjusted as needed. This is especially important for new or growing businesses, as coverage needs tend to increase as an operation matures.

When it comes to getting an aggregate limit increased, there are typically several critical considerations in play, including:

  • Tenure of the Insured
  • Claims History
  • Risk Exposure

If you’ve been with your current insurance provider for a few years, have made no claims and work in a relatively low-risk industry, the likelihood of securing an aggregate limit increase tends to be higher. Conversely, if you jump from carrier to carrier each time your policy renews, make more claims than the average business in your industry or are expanding into higher risk business applications, the probability of an aggregate limit increase is typically much smaller.

What Happens When You Exceed Your Aggregate Limit?

While you may think your business will never face a multi-million dollar loss, tragedy has a nasty habit of striking when we least expect it. Should your business end up with a claim with damages over the aggregate limit of your policy, you are responsible for paying for the extra costs. In an ideal situation, an owner has enough cash on hand to pay for the damages or repairs above the policy’s aggregate limits.

However, in the real world, this is rarely the case. With record-setting settlements and legal judgments appearing in the news at an increasing rate, the possibility of facing a claim above a policy's aggregate limit is something every business owner needs to prepare for.

With this in mind, it's essential to choose your coverage wisely. If you don’t have the cash to pay a claim above your aggregate limit, you may want to consider adding Umbrella coverage.  

How does a Deductible Work?

If you end up facing a covered loss with assessed damages less than the aggregate limit of your policy, your carrier is typically required to make you whole through compensation. That said, the exact amount of a claim payment is contingent on first satisfying your deductible.

Defined as the amount you are required to pay before your insurance coverage kicks in, a deductible can significantly reduce the payout on a covered claim in some circumstances. For example, if your business suffers a $20,000 loss, and your policy deductible is $5,000, you will be required to pay $5,000, and your insurance company will pay the rest. 

If you don’t have enough cash on hand to cover this $5,000 deficit, and the damages interrupt your operation, your business could suffer. Sometimes, deductibles are set as a percentage of a filed claim. For example, a two percent deductible on a $100,000 claim would leave the policyholder responsible for $2,000 out-of-pocket.

While some insurance companies allow insureds to have the deductible withheld from a claim check, others require payment upfront before allowing for a payment. For this reason, it's essential to carefully consider your deductible when selecting coverage.

While a higher deductible may save you money on your premium payment, it can carry the hidden cost of jeopardizing the well-being of your business in the case of a significant loss. If you can't afford the premium on a low-deductible policy option, there's other coverage you can add to a commercial package to lower your risk exposure. Talk to one of our commercial insurance experts today to find out more.  

Individual Aggregate Limits 

It's important to note that a general aggregate limit considers every claim made in a policy period. In other words, if you have a $400,000 general aggregate limit for one year, and you file four $105,000 claims in that year, you’re responsible for the $20,000 differential. To make matters more complicated, a policy may also include individual aggregate limits that limit the payout for a single claim. For example, if you hold a commercial policy with a general aggregate limit of $2 million and an individual aggregate limit of $200,000, you’re responsible for damages above $200,000 on a single claim. While this policy should cover a business owner for up to 10 $200,000 claims, a single $250,000 claim would leave the owner responsible for $50,000.

Fortunately, some carriers allow policyholders to offset this financial liability with what's known as an aggregate deductible. Essentially a cumulative deductible for the entire policy, an aggregate deductible sets an out-of- pocket limit for the policyholder. It's important to know that this limit doesn’t usually cover differentials above individual limits.

If you need more clarity on aggregate limits and how to navigate your commercial policy, give one of our insurance experts a call today. 

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