The Difference: Incident vs. Aggregate Policy Limits
Policy limits are the maximum amounts an insurance company will pay out for claims. These limits fall into two categories:
- Incident Limit: The maximum amount payable for a single covered incident.
- Aggregate Limit:The maximum amount payable for all covered claims during the policy period.
Incident Limits
Incident limits, also known as per-occurrence limits, refer to the maximum amount an insurer will pay for a single claim or incident. This limit applies to each individual event or occurrence that triggers a claim regardless of how many claims are made during the policy period (subject to not exceeding the aggregate limit). For example, with a $1 million occurrence limit, the insurer will cover up to $1 million for each individual claim.
Key aspects of incident limits include:
- Renewal: The occurrence limit resets with each policy period, allowing for payment for new covered claims up to the limit for each incident within the term.
- Coverage Specificity:Not all incidents are covered, so it’s important to review the policy details to ensure it covers the types of events an insured might face.
- Premiums:Policies with higher incident limits generally cost more. Balancing the cost with the necessary coverage level is crucial.
Incident limits are detailed in the policy and provide clear coverage amounts for each claim. Some policies may also have sub-limits for specific types of damages. Deductibles, co-insurance, and other policy features can affect the total payout. For instance, a $10,000 deductible is paid by the policyholder and would reduce the insurer’s payout by that amount for each claim.
Incident limits provide straightforward coverage for each event. They are generally easy to understand, as they cover single events. Insureds are limited to the coverage amount for each incident, however, without the broader coverage options available with aggregate limits. If a single claim exceeds the incident limit, the policyholder will have to cover the excess cost.
Aggregate Limits
An aggregate limit is the maximum amount an insurer will pay for all covered claims during a policy period. Unlike an occurrence limit, which caps the payout for a single claim, the aggregate limit covers the total payout for all covered claims combined.
Key aspects of aggregate limits include:
- Coverage Caps: The aggregate limit caps the total amount the insurer will pay for multiple claims within a policy period. For example, if the limit is $1 million and multiple claims of $500,000 each are made, the insurer will pay up to the $1 million limit.
- Policy Variations: Aggregate limits vary by policy and insurer—some insurance policies may have lower limits than others. Higher-risk entities may have lower aggregate limits due to increased risk.
- Business Impact: Aggregate limits are particularly significant for practices with multiple potential claims. Knowing the limit helps in managing risk and ensuring adequate coverage.
- Combination: Most policies include both an aggregate limit and a per-incident limit, where the per-incident limit applies to each claim, and the aggregate limit applies to the total payout for all claims during the policy period.
The aggregate limit is often a multiple of the per-incident limit. For example, a policy with a $500,000 per-incident limit might have a $1.5 million aggregate limit. Reinsurance may impact aggregate limits, potentially allowing insurers to offer higher limits by sharing risk with other insurers.
With the capped total coverage amount of an aggregate limit, policyholders can better estimate and manage their potential insurance costs. They are also suitable for low-risk scenarios where the likelihood of multiple claims is minimal. However, once the aggregate limit is reached, no further claim expenses will be covered during the policy period, potentially leaving policyholders exposed.
Choosing incident and aggregate limits depends on your coverage needs and risk profile. Incident limits are beneficial for clear, manageable coverage for individual incidents, while aggregate limits offer broader protection for multiple claims over the policy period.
Reference
“Aggregate Limit vs. Occurrence Limit: Decoding Insurance Terminology,” Faster Capital, https://fastercapital.com/content/Aggregate-Limit-vs--Occurrence-Limit--Decoding-Insurance-Terminology.html
The Difference
The Difference is an ongoing educational series from ProAssurance, designed to compare and contrast common items in medical professional liability insurance. The side-by-side comparisons make it easy to compare so you can easily pick up the highlights of each.