Property and Casualty Insurance · Casualty Insurance · 6 min read
Reading Limits and Calculating Payments
- Differentiate between split limits and combined single limits and calculate covered claim payouts under both structures.
- Explain how per occurrence limits and aggregate limits interact under standard commercial general liability policies.
- Describe the role of umbrella and excess liability policies, defense cost provisions, and the consequences of exhausting liability limits.
Fundamentals of Liability Limits and Defense Costs
A limit of liability is the maximum amount an insurer will pay for a covered loss under an insurance policy. The declarations page generally shows the policy's main limits, but policy provisions and endorsements may set or change other limits. State law sets minimum required liability limits for motor vehicle financial responsibility, and state law determines whether split limits or a combined single limit satisfy those requirements as well as what specific minimum dollar amounts apply.
When a liability claim involves legal defense, the policy language dictates how legal expenses are handled. Under standard ISO personal auto and commercial general liability policies, covered defense costs generally are paid in addition to liability limits, meaning legal bills do not erode the funds available for damages. Other policies may count defense costs against their limits. Under standard ISO personal auto and commercial general liability policies, the insurer's duty to defend generally ends when the applicable limit is exhausted by payments of judgments or settlements, subject to the terms stated in the policy.
If the insured's legal liability exceeds the available coverage, the insured may owe the unpaid balance unless a settlement or other arrangement releases that liability. Understanding how these maximums operate ensures that you can accurately calculate an insurer's maximum financial payout for any single event or policy term.
Common mistakes
- Assuming leftover property damage funds in a split limit auto policy can be shifted to pay unpaid bodily injury claims.
- Applying the per accident bodily injury limit without first capping each individual claimant at the per person sublimit.
- Believing that payments under the products-completed operations hazard reduce the general aggregate limit under a standard commercial general liability policy.
- Treating defense costs under standard ISO personal auto or commercial general liability policies as an expense that reduces the available limit of liability.
Key points
- A limit of liability is the maximum amount an insurer pays for a covered loss, with covered defense costs generally paid in addition under standard ISO forms.
- Under split limits such as 25/50/25, separate caps apply to bodily injury per person, total bodily injury per accident, and total property damage per accident.
- A combined single limit provides one total dollar cap per accident for any combination of bodily injury and property damage without separate sublimits.
- Commercial general liability policies apply an each occurrence limit and separate aggregates for specified covered payments; under the standard ISO form, aggregates generally apply separately to each annual period, and covered defense costs generally do not reduce them.
- A standard commercial general liability policy features two separate aggregates: the general aggregate and the products-completed operations aggregate, which do not reduce each other.
- Excess liability policies pay after required underlying primary limits are exhausted, while umbrella policies may also cover certain non-underlying losses subject to a self-insured retention.
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