A:

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.

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