An aggregate limit is the maximum amount an insurance company agrees to pay to cover claims during a defined period, generally a year. Many types of insurance policies have aggregate limits, including auto insurance and health insurance. However, of all insurance types, commercial insurance, particularly in the realm of product liability, utilizes aggregate limits the most. Doing so protects insurance companies from excessive liability in a situation in which a faulty product precipitates an abundance of claims.

Most insurance plans stipulate somewhere in the fine print that they are not willing pay out an infinite amount. In most cases, the policy has a set maximum it is willing to pay in a given period, at the end of which this amount resets for the ensuing period. For example, consider a driver whose auto insurance policy features an aggregate limit of $24,000 per year. This means the company will pay up to $24,000 on legitimate claims during one calendar year, from January to December. It does not matter if it takes one claim, two claims or many claims to reach that limit; the company pays to the limit, and then pays no more.

If the customer submits one insurance claim for $24,000, the company pays it. Likewise, the company pays if he submits two claims for $12,000 each. However, if he submits three claims, each for $10,000, the company pays the first two claims in full and $4,000 of the third claim. The responsibility reverts back to the customer for the remaining $6,000 on the third claim.

Insurance companies employ teams of actuaries, statisticians and analysts to ensure they remain profitable by bringing in more in premium dollars than they pay out in claims. The research conducted by these professionals determines where a company sets its aggregate limits, as well as how much it charges in premiums, which customers it agrees to ensure and so forth. Everything in insurance is interconnected, and it all relates back to ensuring solvency by revenues exceeding expenses. The most common way for a policyholder to receive a higher aggregate limit is to pay more in premiums.

Commercial insurance companies are more assiduous in their use of aggregate limits than any other type of insurer. The biggest reason is that this particular insurer assumes liability on behalf of its customers for product defects. Suppose a men's grooming company brings to market a faulty electric shaver that has a tendency to explode when overheated, causing facial injury to the user. The lawsuits are sure to pile up in that scenario, resulting in an oppressive volume of product liability claims. With an aggregate limit, the insurer sees to it that a single faulty product is not capable of putting the entire company at risk of insolvency.

  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. What is the main business model for insurance companies?

    Read about the most important components of an insurance company business model, such as risk pricing, investing and claims ... Read Answer >>
  3. Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products. Insurers can deny coverage in many different instances:Non-Renewal ... Read Answer >>
  4. How do I choose which insurance company to use?

    Picking an insurance company to use is not an easy task, considering the financial crisis of 2008 and 2009. Several financial ... Read Answer >>
Related Articles
  1. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  2. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  3. Insurance

    12 Insurance Questions for High Net Worth Families

    High net worth families should ask themselves these 12 questions regarding comprehensive insurance.
  4. Tech

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  5. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  6. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  7. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  8. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  1. Aggregate Limit

    The aggregate limit is the maximum amount an insurer will pay ...
  2. Aggregate Limit Of Liability

    Aggregate limit of liability is the most an insurer can be obligated ...
  3. Adjuster

    An insurance claims agent. A claims adjuster is charged with ...
  4. Bureau Rate

    A standard price per unit of insurance set by a state's insurance ...
  5. Loss Development

    Loss development is the difference between the final losses recorded ...
  6. Funding Cover

    Insurance premiums held in an account and used to pay insurance ...
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center