Insurance is never straightforward. Every policy can be interpreted in different ways, with some requiring you to read streams of pages before you understand exactly what it covers.
Your limit of liability basis is just one example of how a seemingly minor detail in a commercial insurance policy could cause enormous disruption. When it comes to any form of liability insurance, this limit can be critical when faced with legal action.
In this blog, we focus on limits in relation to the insurance you purchase to protect your business against third-party actions, such as Professional Indemnity, Public Liability or Directors’ & Officers’ Liability. We explore what limits of liability are, and why you should avoid ‘aggregated’ limits whenever you can.
What are limits of liability?
Your liability limits are, as you might imagine, limits on the amount you’re covered for when on the receiving end of unwelcome legal action – whether for alleged negligence, breach of contract or even suggested defamation.
Say for example that a client sues you for an alleged mistake in the work you delivered. The insurance would normally step in to pay for the costs to defend you, and amounts awarded against you, whether damages or costs for the other side. What you will have claimed for could be deducted from the total amount your insurer has allocated to protect you, but this depends on the limit basis you’ve taken.
Therefore, should you need to claim again within the same policy year, you may find your insurer says that you’ve less cover left than expected, or even that you’ve now exceeded your total amount insured. In other words, you’d be required to foot the bill for any further recoverable losses until your policy limit is refreshed.
This is the danger of an ‘aggregated’ limit of liability. However, there are two types of liability limits, one of which can help you avoid this…
What’s the difference between the types of claim limits?
By far the preferred option, policy limits on an ‘any one claim’ basis refresh after each claim. This means that, if you had a £1,000,000 limit of indemnity for instance, you could have multiple claims with full loss in a single policy period (such as a year) – provided they don’t individually exceed the amount.
For example, you could have a claim for £500,000 at the start of the year, and then six months later have another incident which costs £600,000. A few weeks later, you might have a claim that costs £300,000. Despite the bad year, the insurance would step in for all three claims, paying out £1,400,000 (minus the three excesses of course).
Here, your limit is a fixed amount for a set policy period, with each claim chipping away at the total amount. So, once £1,000,000 had been exceeded, you’d need to wait until your policy period refreshed.
If we use the above example of the three claims during the same year, then you would have been covered for the first £1,000,000 only. Once that was exhausted, you’d be on the hook for the final £400,000.
That is why we would always recommend an ‘any one claim’ basis over an ‘aggregated’ one.
Why might I be offered one type of liability limit and not the other?
Some types of insurance are always normally quoted on an ‘aggregated’ basis (such as Product Liability), whereas others are always quoted on an ‘any one claim’ basis (such as Employers’ Liability). Where cover could be offered on either basis, such as with Professional Indemnity, the only real drawback with an ‘any one claim’ basis is that sometimes insurers charge more for it.
Insurers won’t always be forthcoming with the offer of the ‘any one claim’ basis though. This is particularly true when you’re purchasing the insurance direct from the insurer, as it’s in their best interests to cap the maximum amounts they may be obligated to pay you. That’s why they often offer ‘aggregated’ limits by default.
Another reason a limit may be ‘aggregated’ by an insurer would be if you work with American organisations. Your insurer will almost certainly refuse to mirror your ‘any one claim’ basis for any contracts undertaken under US jurisdiction in order to limit their exposure. This is because these claims can skyrocket in comparison to those in the UK.
There are certain sectors where insurers will be reluctant to – or even refuse to – provide anything other than an ‘aggregated’ basis of cover. This is generally for higher hazard sectors, such as when providing Professional Indemnity in the FinTech space.
On the other hand, there are certain types of insurance which need to be on an ‘any one claim’ basis to comply with regulation or industry body standards, such as surveyors and solicitors. This has the knock-on effect of reducing the number of insurers willing to quote, and therefore increases the premiums that are typically charged for these risks.
Most insurers are willing to offer Professional Indemnity for lower risk activities, such as those carried out by technology and media businesses, on an ‘any one claim’ basis. However, again, they may charge more for the privilege. Freelancers may therefore opt to keep an ‘aggregated’ limit in order to save costs, but we deem this to be somewhat of a false economy and not something we’d ever recommend.
How RiskBox can help
So, if you ever have the choice between an ‘any one claim’ and an ‘aggregated’ limit basis, always go for the former. It gives you far more protection against suffering multiple claims in a policy year.
Not sure if you have the choice? Or want to make the switch? In a lot of cases, we see businesses with the right insurer but with the wrong cover. Without the technical support of a broker, little things such as your limit basis can trip you up at a time when you really need the financial support.
Our aim is to keep things simple and help make insurance easier for you, so if something goes wrong you have the right policy to rely on. If you feel your policy could benefit from an expert’s opinion, get in touch today. You can reach us on 0161 533 0411 or by emailing firstname.lastname@example.org.
Agencies - September 25, 2023
Blog - September 11, 2023