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Homer Smith Insurance Blog
Business Insurance – know your limits
Take a look at the insurance policy covering your business and you will see a section setting out your insurance limits. As the operator of Sam’s Superior Services, for example, you might find:
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Sam’s Superior Services Coverage Coverall Protection |
Insurance Limit $1,000,000 |
So, that’s pretty good, it looks like you have a million dollars in coverage. You may need to look further to understand whether your policy offers coverage on a “per occurrence” basis or an “aggregate” basis. If you coverage is on an occurrence basis, your insurance limit provides up to one million dollars of coverage for each and every eligible loss that takes place during the applicable (annual) policy period. The whole million is available to respond to each eligible incident that occurs during the policy period.
Things can get more complicated if your million dollar coverage is an aggregate limit. That type of protection means that the million dollar limit applies over the entire policy period. Why does this make a difference if it is still a million dollars? Well, let’s say Sam’s Superior Services is less superior than advertised.
If Sam buys a $1 million aggregate policy for a Jan. 1, 2012 to Jan 1, 2013 policy period and Sam’s Superior Services is sued five times during the policy period that million dollar policy could be melting away.
| Loss | Date | Amount | Amount Paid | Available Aggregate Limit |
| Loss 1 | 2-23-12 | $200,000 | $200,000 | $800,000 |
| Loss 2 | 3-3-12 | $450,000 | $450,000 | $350,000 |
| Loss 3 | 6-12-12 | $175,000 | $175,000 | $175,000 |
| Loss 4 | 8-4-12 | $300,000 | $175,000 | ($0 Available) |
| Loss 5 | 12-6-12 | $50,000 | $0 | ($0 Available) |
| Total Paid | $1,000,000 | $1,000,000) |
Under Sam’s "aggregate" limit policy, each loss reduced the available limit until coverage was exhausted. In this example, Sam’s Superior Services would have had to manage $175,000 on its own - $125,000 from the fourth loss and the entire $50,000 from the fifth. Sam may want to improve his superior services or seek another line of work.
Insurance companies use aggregate limits to help control their financial exposure. You should expect the premiums on an aggregate policy to be lower than a per occurrence policy reflecting this limitation. There are other ways to control loss amounts and insurers may use sub-limits as a method to control losses on some types of policies. A sub-limit is a coverage amount that applies to only certain types of losses or to losses involving certain types of property. Sub-limits may be used with either "occurrence" or "aggregate" limit policies. To keep things less confusing, let's use the same Sam’s Superior Services policy situation and adding an Occurrence policy with sub-limits. In this instance, the policy provides the following:
$100,000 Sub limit for Type B Losses
$50,000 Sub limit for Type C Losses
| Loss | Date | Amount of Claim | Amount Paid |
| Type A Loss | 2-23-12 | $200,000 | $200,000 |
| Type B Loss | 3-3-12 | $450,000 | $100,000 |
| Type C Loss | 6-12-12 | $175,000 | $50,000 |
| Total Paid | $825,000 | $350,000 |
In this case, even with a “per occurrence" limit, the sub-limits will have a substantial impact. In this instance, Sam’s Superior Services would be left to handle $475,000 in losses that wouldn't be paid by the policy.
If you have a business insurance policy, you should “know your limits.” Talk to your Washington business insurance agent to be certain of exactly what your policies provide. A professional at Homer Smith insurance would be a good person to contact to discuss this very important issue.
