What the difference between per occurrence and aggregate liability limits? There are two really significant legal terms that you need to understand – especially if you ever have to submit a claim on your liability insurance. This article will discuss the terms “per occurrence limit” and “aggregate limit” so you know the difference.
A per occurrence limit is the most the insurer must pay for for the sum of all damages for any one occurrence. The policy will never pay more than the per occurrence limit for any one occurrence. The definition of “occurrence” is very important here, and is generally defined as, “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. There is a lot of legal wrangling and industry over this definition. A per occurrence limit can sometimes be referred to as “any one claim,” “per claim,” and “each and every claim.”
A standard commercial general liability policy has a $1,000,000 per occurrence limit. So if your business was found liable for an accident that caused bodily injury or property damage to a third party for a sum of $800,000 – the policy would pay for that amount, less any deductible. But if the claim amount was $1,200,000, the policy would pay $1,000,000 (the per occurrence limit), less deductible, and you would have to pay the extra $200,000 out of pocket.
The aggregate limit is the total amount the policy is obligated to pay in any one policy term, for 2 or more occurrences, subject to the per occurrence limit. So once you reach the aggregate limit, then your insurer will no longer pay out for the rest of the current term. So if the costs of judgments, expenses and legal fees of all claims made against you within the term of the policy reach you aggregate limit, then the insurance will no longer pay – because the policy coverage will have been exhausted.
Think of an aggregate limit as similar to a piggy bank. Let’s say you have an annual policy with A January 1st start date with a $2,000,000 in your piggy bank saved up for rainy days (bodily injury or property damage to a third party). If your damage a customers property in March and costs $400,000 – your piggy bank ‘aggregate limit’ will cover your bills. Then in July a customer slips and falls and sues you for $1,000,000 – you would still have enough to cover it. However, if you are unfortunate enough to damage a customers home in September and amount you found liable for was $800,000 your piggy bank savings can only pay $600,000 of that amount – and the remaining $200,000 would be out-of-pocket as you have exhausted your ‘piggy bank’.
The declarations page of a general liability policy will list how much the policy will pay for claims on behalf of its insured, for each specific limit. Below is in example of commercial general liability policy’s limits of insurance as listed on the declarations page:
What the difference between per occurrence and aggregate liability limits? To put the differences across in a real-life situation, let us take a typical general liability policy as an example. A roofing business buys a general liability policy with an aggregate limit of $2,000,000. The business owner may think that if the damage that they were found liable for – on a commercial building that they re-roofed – that the insurance company will pay for damages up to the $2,000,000.
This is a common and potentially very costly misunderstanding. Most insurance policies carry “per occurrence” limits, which means that the insurance companies have a ceiling for the amount of money that they will compensate per accident. In the case of our example, the roofing business may have a $2,000,000 aggregate limit with a $1,000,000 per occurrence limit. This means that the insurance company will only pay up to $1,000,000 for the damage for that incident.
So if the costs to repair the damages to that building is $1,300,000, exceeding the per occurrence limit of $1,000,000, the roofer would have to fork out $300,000 out of pocket to pay for the repairs. This is my it is vital that you you have both your per occurrence and aggregate limits high enough to protect your business – and often an excess liability policy or commercial umbrella is needed to do that.
There are certain expenses that can be classified by the general liability policy as supplementary payments, that do not count toward the limits of liability. Some examples are fees fro bonds, prejudgment interest and expenses for legal defense. It is important to note that in some policies the supplementary payments are included inside the per occurrence limit of liability. In a large case legal fees can reach into the hundreds of thousands of dollars – so this could have a large impact on what the policy actually pays to the inured third party.
We hope this article on what the difference between per occurrence and aggregate liability limits? has been informative. It is important to be able to distinguish these limits so you aren’t left with a huge exposure of having to pay for a claim out of pocket when you thought your policy was going to cover you.
