Numbers that matter: Knowing your policy limits
Every insurance policy has limits that state the maximum monetary figure that will be paid out in the event of a claim. Indeed, some policies will have multiple limits and sub-limits. This article will demystify the different types of limits you're likely to encounter with your package of insurance coverage. You'll find out about policy limits, aggregate limit of liability, per-occurrence limit and be able to distinguish them apart.
It's a topic that often comes up when discussing underinsurance with us – either in the context of policy limits (liability policies) or sum insured (property insurance).
What's a policy limit?
A policy limit is the maximum amount an insurer will pay when you make a valid claim on your policy.
If your professional indemnity insurance is for $20 million, for example, that's the maximum insurance payout you'll receive. However that's not to say you will be paid $20 million. You will be covered for the amount that you are liable to pay to a third party up to $20 million.
There are two factors that could influence your required level of cover. For professional indemnity insurance, for example, your industry association or applicable government regulations may have set the limits of your cover. Accountants who are members of the CPA may have a different minimum limit than say a mortgage broker. The other factor when looking at the limit for professional indemnity insurance is whether your business has signed a contract that stipulates a level of cover. To set the level, be guided by:
The size of your largest contract or client
How many parties rely on your advice
Potential defence costs
The likely financial harm or detriment that will be caused to third parties who rely on your [incorrect or negligent] advice
As for public liability insurance, the minimum is $5 million and, for the average business, the maximum is usually $20 million. That amount will depend on your risk profile, contractual requirements and regulations covering your industry.
When you sign a new policy or renew an existing one, you'll need to select an appropriate limit based upon a risk assessment of your business.
How aggregate limits differ
There's an important distinction between the individual and aggregate limits, though. An individual limit refers to your maximum payment for a single claim. Meanwhile, the aggregate limit of liability is the cumulative total the insurer will pay for all claims in any policy year, that is, the entire term of the policy. So after you've reached that total for that policy year, your insurer is no longer obligated to cover you for losses, legal costs or claims under that policy.
Aggregate limits are typically part of products liability and professional indemnity, D&O liability and management liability insurance policies. For example, an aggregate limit may apply to the professional services that you provide or the products that you manufacture or sell.
Per-occurrence limit defined
Meanwhile, public liability policies respond to the date that the injury or damage occurred. Importantly, the limit applies per occurrence, that is per incident or claim.
The costs of defending liability claims can be very expensive. We can advise you on whether the defence costs are included in the policy limit or covered under a separate sub-limit.
Know your options and limits
Insurance cover is never set and forget. Discuss with us what limits mean for your coverage. It's a balance between covering the worst-case scenario for your business or going for minimal insurance, which means you may be out of pocket. We find that our clients who take out a policy with a higher limit liability, for example, tend to be extra vigilant in their risk management. It works as protection to your business in case you are sued.