Liability Insurance Limits

Tom WallaceContracts, General, Liability Insurance, Product Liability

liability insurance limits explained

Why you should know how the liability insurance limits work?

The more product you sell the greater the chances of having to deal with contracts. Most, if not all, contracts you will encounter have provisions for insurance coverage. These provisions will stipulate the type of coverage, insurance limits, additional insured status, and perhaps a waiver of subrogation. This post will explain the insurance limits.

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Insurance Limit Terms

Occurrence:  An event or series of related events (simplified explanation but sufficient for this topic)

Aggregate:  Maximum insurance limit any POLICY YEAR

General Aggregate:  Maximum insurance limit paid for NON PRODUCT liability occurrences in one policy year

Product/Completed Operation:  Your product or service after ownership is transferred to others (simplified)

Product/Completed Operation Aggregate:  Most that will be paid for PRODUCT/COMPLETED OPERATIONS liability occurrences in one policy year

Insurance Limit Types

Often you will see the primary liability insurance limits written like this:

1. Bodily Injury & Property Damage Occurrence Limit $ 1,000,000
2. Personal & Advertising Occurrence Limit $ 1,000,000
3. General Aggregate $ 2,000,000
4. Products & Completed Operations Aggregate $ 2,000,000

What does it all mean?

The first limit in the list is simply the most the policy will pay for any one occurrence. Remember, this is for bodily injury and property damage for which your business is liable. The next item is the maximum amount paid for “Personal and Advertising Injury” on a per occurrence basis. This coverage is a topic all in its own so I will not go into depth here.

The next two limits refer to the aggregate amount an insurance contract will pay for occurrences during the policy period. The General Aggregate will apply to NON PRODUCT related occurrences. These would be occurrences that stem from your premise (slip and fall) or operations in general.

The Product and Completed Operations Aggregate applies to occurrences that stem from your PRODUCT. Completed Operations is a term that fits more with businesses that build or fix things.

Contracts

Typical limits in a contract require a minimum of $1,000,000 per occurrence and $2,000,000 aggregate (1M/2M). We are seeing more and more insurance limit requirements that stipulate $2,000,000 per occurrence and $4,000,000 aggregate (2M/4M). The typical General Liability policy is written 1M/2M limits with some companies writing the 2M/4M limit as the primary layer of insurance.

I have limits of 1M/2M and I need limits of  2M/4M

Your first option is ask your current insurance company if they offer 2M/4M limits. Second option is to find another insurance company that can offer those types of limits. If neither of those fit then price a Commercial Umbrella Liability policy which are usually written with the same occurrence and aggregate limits. So, a $ 1,000,000 Umbrella policy would look like this 1M/1M. As you can see the math does not work well if 2M/4M are your insurance limit requirements:

       Limit Type Current Limits Contract Requirements
General Liability Limit

1M/2M

2M/4M

Commercial Umbrella Limit

1M/1M

Total Limit

2M/3M

2M/4M

Contractually you can meet the OCCURRENCE limit but not the AGGREGATE limit. So the only way to satisfy the above example is to buy a $2,000,000 Commercial Umbrella policy. However, the OCCURRENCE limit is exceeded by $1,000,000:

       Limit Type Current Limits Contract Requirements
General Liability Limit

1M/2M

2M/4M

Commercial Umbrella Limit

2M/2M

Total Limit

3M/4M

2M/4M

 Now What?

Since negotiation is part of any contract try it with you vendor. You may be able to lower the AGGREGATE to $3,000,000. If successful, you could purchase a $1,000,000 Commercial Umbrella and still meet the requirements.

Pros and Cons

Cost is the benefit of having your primary insurance policy written as 2M/4M.  This setup avoids front end costs associated with Commercial Umbrella Liability policies.

Umbrella policies can offer greater protection if you have existing automobile or workers compensation insurance in place.  There can be other benefits which are beyond the scope of this post.

I hope this information helps with understanding liability insurance limits contained within commercial liability insurance policies.

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Thanks for reading,