Everything you need to know about insurance coverage limits

Liability insurance exists to protect you and your business in the event that someone decides to sue your company. Instead of having to pay for damages from your own funds, liability insurance covers the costs of damages you're responsible for causing.

What is a coverage limit?

The amount of money an insurance company will pay for a claim is not infinite – if it were, the premium would be enormous! In order to keep costs reasonable, your insurance company will set insurance limits of liability. The coverage limit by definition is the maximum amount that the insurance company will pay for a single incident or claim, or the total amount that will be paid over the term of the policy. In general, higher limits will result in a more expensive policy, because the amount the insurance company could pay will be higher. Therefore, it's in every business owner's best interest to balance risk and budget to choose the appropriate level of insurance coverage.

Balancing Cost and Coverage

An insurance rate is determined by assessing risk, or the likelihood of a claim being filed, as well as the maximum amount that may be paid if such a claim were to be filed. In other words, if it's likely that the insurance company will have to pay a substantial settlement in the future, the premiums will be higher.  

Whenever an incident maxes out your policy, you can be responsible for the difference. For example, if you are liable for $2 million in damages but carry only $1 million in insurance, you will have to pay the other $1 million out of your pocket.

As a business owner, this puts you in the position of deciding between taking a risk with low minimum insurance coverage or paying more per month for coverage with a higher limit. In most cases, a happy medium can be found that will balance your needs with your budget.

The minimum liability insurance you carry should be enough to cover the most likely scenarios your specific business could be involved in. High-risk environments are usually better suited to higher minimum liability insurance limits.

Aggregate vs. occurrence limits

When you look at a business insurance policy, you’ll often see two kinds of limits: per occurrence and aggregate. A per occurrence limit is the most your insurer will pay for a single claim, while the aggregate limit is the most the policy will pay out during the entire policy period (usually a year).  

How deductibles affect your insurance coverage

Coverage limits aren’t the only factor to consider. Deductibles play a big role, too. A deductible, sometimes called ‘retention,’ is the amount you pay out of pocket before your insurance kicks in. Choosing a higher deductible usually lowers your premium, but it also means you’ll need to cover more of the cost before insurance pays. Balancing deductibles and limits can help you get the right mix of affordability and protection. 

Common types of small business insurance coverage

General liability insurance is one of the most common types of commercial liability policy that a business might need. It can cover things like accidental customer injuries, damage to other people’s property, and defense costs in the event of a lawsuit. It does not cover your own business property, professional services, employee injuries, or intentionally malicious activity.

Policies sold by Hiscox have limits as low as $300,000 and as high as $5 million, depending on the type of policy and your industry. A common liability limit for this type of policy is $2 million.

Another very common type of commercial liability coverage is professional liability, or errors and omissions insurance. E&O policies are essential for service professions like consulting where clients may act on your professional advice.

Hiscox E&O policies generally have limits of $250,000 up to $5 million.  

The amount of insurance that you need depends on the type of business you have, the level of risk you anticipate, and what you can afford to pay in premiums.

Understanding your specific policy's coverage limit definitions is vitally important as failing to do so could put you at risk of being underinsured. Commercial liability policies will have the limits listed on the policy's declarations page. When buying insurance, you will be able to choose the liability limit. The limit is the maximum amount that will be paid for any single incident regardless of how many people are involved in it. Liability claims are paid per incident rather than per lawsuit.

In some cases, defense costs are covered without reducing your limit. For example, if you are sued for $1 million and you rack up $100,000 in defense costs, your $1 million policy could cover both the judgment and your defense.  

The finer points of limits of liability can become quite complex, and it's important to have your specific policy explained to you by an expert who understands your needs and the details of the policy you've purchased. Whether you have commercial liability insurance already or you're looking to invest in a policy, the commercial insurance professionals at Hiscox can help you understand the best option for your needs, so reach out to them today.