Policy Limits
Definition
The maximum amount an insurance company will pay for a covered loss. Limits can be stated per occurrence, per policy period (aggregate), or per category of loss.
Example
A liability policy has a $1 million per occurrence limit and a $2 million aggregate limit. Three separate claims of $800,000 each occur in one policy year. The first two are paid in full ($1.6 million total), but the third is limited to $400,000 (the remaining aggregate), leaving the insured responsible for $400,000.
In Practice
Policy limits are a critical coverage feature. Insureds should ensure limits are adequate for potential losses. Limits can often be increased for additional premium. Some policies have sublimits for specific types of losses. Umbrella policies provide excess limits above underlying policies.