4.3 Limits of Liability

The limit of insurance is the maximum amount a liability policy will pay for a covered loss. This limit applies regardless of the number of insureds, claims submitted, lawsuits filed, or individuals or organizations seeking damages. Some policy limits apply separately to each covered occurrence or loss, while other limits establish the maximum amount the insurer will pay for all covered losses during the policy period. The way these limits are structured and identified depends on the type of policy and coverage provided.

Per Occurrence Limit

The per occurrence limit is the maximum amount a policy will pay for all covered losses resulting from a single occurrence. This limit applies to the combined losses arising from that event, subject to any other applicable policy provisions. For example, the liability limit for bodily injury and property damage under a Homeowners policy generally applies on a per-occurrence basis.

Per Person Limit

The per person limit is the maximum amount a policy will pay for covered injuries sustained by any one person in a single occurrence. This limit applies separately to each injured person, subject to any other applicable policy limits. For example, the liability limit for medical payments coverage is generally expressed as a per-person limit.

Aggregate Limit

The aggregate limit is the maximum amount a policy will pay for all covered losses during the policy period. This limit applies regardless of the number of occurrences, claims, or claimants involved. Each payment made under a per-occurrence or per-person limit reduces the remaining aggregate limit available for future covered claims during that policy period. Once the aggregate limit has been exhausted, no additional payments will be made for losses subject to that limit.

Although aggregate limits may occasionally be included in personal lines policies, they are used more frequently in commercial liability insurance policies.

Example

A casualty insurance policy has a $250,000 per-occurrence limit for bodily injury claims and a $1 million aggregate limit. An accident occurs on the insured premises and injures two people. Each injured person is awarded $20,000 in damages. Because both injuries resulted from the same occurrence, the damages are combined when applying the per-occurrence limit. The total covered loss is $40,000, which is below the policy's $250,000 per-occurrence limit. Therefore, the policy can pay the full amount of the damages. The $40,000 payment also reduces the aggregate limit available for the remainder of the policy period from $1 million to $960,000. If another covered occurrence takes place during the same policy period, up to $250,000 may still be available for that occurrence, subject to the remaining $960,000 aggregate limit.

Split Limits

Split limits establish separate maximum amounts the policy will pay for different categories of loss arising from a single occurrence. They are commonly used in automobile liability policies and typically include a per-person limit for bodily injury, a per-occurrence limit for total bodily injury, and a per-occurrence limit for property damage.

Combined Single Limit

A combined single limit is the maximum amount a policy will pay for all covered losses arising from a single occurrence. Unlike split limits, it does not establish separate limits for different types of loss. In an automobile liability policy, one combined per-occurrence limit applies to both bodily injury and property damage claims.

Example

Z causes an automobile accident that injures two passengers. Each passenger incurs $150,000 in medical expenses, and the accident also causes $50,000 in property damage. The amount Z's Personal Auto policy pays depends on whether the policy uses split limits or a combined single limit.

Assume the policy has split limits of 100/300/100. The first number represents a $100,000 bodily injury limit for each injured person. The second number represents a $300,000 bodily injury limit for the entire accident. The third number represents a $100,000 property damage limit for the accident.

Because each passenger's medical expenses exceed the $100,000 per-person bodily injury limit, the policy will pay no more than $100,000 for each passenger. The total bodily injury payment will therefore be $200,000, even though the policy allows up to $300,000 for bodily injury arising from one accident.

The policy will also pay the full $50,000 property damage claim because it is below the $100,000 property damage limit. The policy's total payment will be $250,000, leaving Z responsible for the remaining $100,000 in bodily injury damages.

Now assume the policy has a $400,000 combined single limit. This limit applies to any combination of bodily injury and property damage resulting from one accident. The two bodily injury claims total $300,000, and the property damage claim is $50,000.

Because the total covered loss of $350,000 is below the $400,000 combined single limit, the policy will pay all three claims in full.