Calling all business owners (don’t worry this isn’t a blog about limits in Calculus). Let’s talk about your general liability insurance coverage. Sounds exciting right? Well perhaps not the most exciting subject but definitely easier to understand than Calculus. Many new business owners aren’t surprised to learn they need to purchase liability insurance but few are aware of the specifics of what they are actually buying. What is this weird terminology? What on earth is an aggregate? Are these even real words? If I wasn’t a licensed agent that had to take a course and pass an exam then these are the same questions I would be asking.
Aggregate Versus Occurrence
On your standard general liability policy two terms that are important to take notice of are the “aggregate” limit and the “occurrence” limit.
Say the occurrence limit is 1,000,000 and the aggregate limit is 2,000,000, as it commonly is for small business general liability policies. Here’s what these terms mean. The one million for each occurrence simply means that the most the insurance company will pay out for any single claim is one million dollars. If the claim is substantial enough and exceeds the limit for occurrence then the business owner is responsible for the remainder. Let’s move on to the aggregate limit now.
Suppose for whatever reason a business incurs multiple claims throughout the policy period (highly recommend avoiding this worst case scenario by the way; do not try this at home folks). Let’s pretend each claim is less than the occurrence limit and combined eventually adds up to 2,000,000. Now in this scenario our fictional business must be seriously booby trapped to incur so many claims but let’s digress. If your aggregate limit is two million then that is the most the insurance company will pay out regardless of how many claims have been incurred. Once you reach that aggregate limit the insurance company will refuse to pay any further claims.
These two limits make up the basis of your standard general liability policy. There are other terms and other coverages frequently included but the bread and butter of your coverage are the occurrence and aggregate portions. While we’re on the subject of limits, let’s go over ways in which limits can be increased. Because our fictional business definitely needs higher limits, right?
For the purposes of explaining the difference between your occurrence limit and your aggregate limit, we used the standard 1,000,000 occurrence/2,000,000 aggregate example. Most general liability policies start with these limits. In the above example we talked about a fictional business ridden with claims. Whether these fictional owners are negligent or simply unlucky we don’t know…but let’s assume they realize they need higher limits. They can do one of two things. First, they can consider increasing the limits on the insurance policy from 1,000,000 occurrence/2,000,000 aggregate to 2,000,000 occurrence/4,000,000 aggregate.
That’s one way they can increase their limits. The second is to keep their limits at 1,000,000 occurrence/2,000,000 aggregate and purchase an additional insurance policy called excess liability (sometimes referred to as a commercial umbrella). A commercial umbrella can be for one million, five million, or even ten million dollars. The point is that once the underlying policy has been maxed out, the umbrella policy will then take over and pay out future claims filed against the business.
This is the very basis of a general liability policy. Regardless of whether other coverages are included or not, there will always be an occurrence limit and an aggregate. Deciding on the right limits for your business is up to the owner and the advice of their insurance agent. We may not be able to school you in Calculus, but if you want to go over your general liability limits we would be happy to do so.