What are "aggregate limits" in liability insurance?

Aggregate limits in liability insurance refer to the maximum amount that an insurer will pay for all covered claims during a specified policy term, regardless of the number of individual claims made. This is crucial for policyholders because it sets a ceiling on the total payout that the insurance company is obligated to provide in any given period, ensuring that the insurance coverage has a defined boundary that can help in budgeting and risk management.

For instance, if a policy has an aggregate limit of $1 million, this means that the insurer will cover up to that amount for any combination of liability claims throughout the policy year. Once the limit is reached, the policyholder would be responsible for any additional costs beyond that limit.

Understanding this concept is essential for insured parties to assess their coverage needs and potential exposures accurately, as they must consider how aggregate limits might affect their financial protection in cases where multiple claims could arise. It highlights the importance of selecting adequate aggregate limits in order to avoid being underinsured in the face of multiple incidents.