Aggregate Deductible: What it is, How it Works

What is Aggregate Deductible?

An aggregate deductible is the limit deductible a policyholder would be required to pay on claims during a given period of time. Aggregate deductibles are most likely to be features of product liability policies or policies that might result in a large number of claims during a certain time period.

How an Aggregate Deductible Works

The draw of an aggregate deductible policy feature is that it puts a cap on the amount the insured has to pay. Manufacturers purchase product liability insurance to protect themselves from claims resulting from damages caused by their products. It is especially valuable for products that can cause significant damages if not manufactured correctly, such as medicines and automobiles, and with products that are sold in high volumes, such as toys.

While policyholders may have product liability insurance batch clauses, not all states will allow the policyholder to treat all claims as if they were part of the same occurrence. If each claim is considered independent, then the policyholder will have to pay the deductible for each claim, even if the deductible is greater than the claim amount. This essentially creates a situation in which the policyholder is not insured.

Example of an Aggregate Deductible

For example, a canning company is notified that some of its products are making the consumers sick. The company’s per occurrence deductible is $10,000, but it also has an aggregate deductible that designates that it does not have to pay more than $100,000 in deductibles in a given year.

The total number of claims reaches 1,000, and each claim valued at $5,000. Without an aggregate deductible, the company would be responsible for the entire claim, and would ultimately have to pay out $5,000,000 ($5,000 claim value x 1,000 claims). The aggregate deductible, however, limits the company’s total deductible to $100,000.

Aggregate Deductibles and Health Insurance

Aggregate deductibles are also used in family health insurance policies. Under an aggregate deductible family health insurance plan, the total family deductible must be paid out-of-pocket before health insurance starts paying for the health care services incurred by any family member.

With an aggregate deductible, there is no embedded deductible for each individual family member to meet. Aggregate deductible family health insurance may carry a lower monthly premium, but the coverage doesn't take effect until the full family deductible is paid out of pocket, which can be much higher than individual embedded deductibles for each family member.

Special Considerations

 In some cases, an aggregate deductible can enhance individual health coverage, according to the Center for Health Insurance Reform at Georgetown University. If an individual family member incurs a significant amount of medical expenses, the individual will fulfill their deductible sooner because it is lower than a family deductible would be. This could save a family thousands of dollars.