What business owners need to know about insurance limits and deductibles
One of the great things about business insurance is that you can control your costs when choosing your coverage. That’s mainly because providers offer flexibility in setting your policy limits and deductibles. These features affect your costs in different ways and can be fine-tuned to ensure you have the protection you need at a price you can afford. But what exactly are insurance limits and deductibles?
This article has helpful information for business owners and decision-makers on this topic. So, if you’re researching business insurance but aren’t clear about choosing your insurance policy limits or deductibles, we encourage you to read on!
Understanding insurance limits
Not every term used in insurance is self-explanatory, but “insurance limits” are exactly what they sound like: Maximum amounts a policy will pay for a covered incident.
Let’s say you have a general liability policy with a $250,000 liability coverage limit. Now, imagine that a customer suffers a severe injury on your property, sues your business for $175,000, and is awarded that amount. Because the figure is less than your insurance limit, your policy can cover the judgment. On the other hand, if someone sues your business and you’re found liable for $260,000, you’ll have to pay the difference between that number and your general liability insurance limit ($10,000).
Those are simplified examples, of course, but they highlight the function of an insurance limit—creating necessary boundaries for your coverage. There are actually three main types of insurance policy limits, as we explain below.
Insurance limits: The 3 types that affect your coverage
Business insurance policies have three primary types of insurance limits:
- Per occurrence limit. This figure is the maximum your policy will pay for a single covered incident. For instance, if a storm damages your property, the per occurrence limit applies to costs related to that specific severe weather episode.
- Aggregate limit. An insurance aggregate limit is the total your policy will pay in a defined period—typically one year. So, if your policy has an aggregate limit of $1 million, it can pay up to that amount, spread across one or several incidents (keeping in mind the per occurrence limit, of course), during the policy period.
- Per claim limit. This limit is specific to claims-made policies. They can cover claims submitted during the policy period. The per claim limit indicates the maximum amount of coverage for each claim.
These are the main types of limits. There are others, like combined single limits and split limits, but if you understand the three above, you’ve got a solid foundation to work from when researching and buying business insurance.
Deductibles: A limit on what you pay
Choosing what deductible applies to your policy can also affect your insurance costs and coverage. A deductible is how much you pay towards a covered claim. You might think of your deductible as the amount you’re willing to self-insure. In return, your insurance provider will likely discount your premium payments.
For example, imagine you have a business insurance policy with a $1,000 deductible and you experience a property damage incident that results in a $7,000 claim. You’ll pay $1,000 toward the repair cost, and your insurer will cover the remaining $6,000. Consequently, it’s important to know what your deductible is for every business insurance policy you have and ensure you’re able to cover that amount if you have to file a claim.
Deductibles are also important because they can affect your premium, which is the amount you pay to your insurance company for coverage. Generally speaking, a higher deductible means a lower premium. In essence, you’re agreeing to take on more of the financial responsibility for incidents, and your insurer rewards you with coverage at a lower cost.
It’s a little like buying a car. The bigger your down payment is, the lower your monthly payment will be. So again, it’s essential to weigh the benefits of lower and higher deductibles and premiums.
Be aware that different policy types have different insurance limits.
There are many types of business insurance, including general liability, professional liability, commercial auto, workers’ compensation, commercial property insurance (like in a business owners policy), cyber insurance, and others. Insurers use the various insurance limits explained above differently depending on the policy, so it’s important to understand the impact on your coverage before you buy a policy.
Yes, you can change your policy limits later if necessary, and business owners often do as their companies grow and evolve. But it’s ideal for your coverage and insurance needs to align at the start of your policy period. Having insurance limits that are too high or too low, even for a short time, isn’t a good idea.
How to choose your insurance policy limits
What information should you use to select the limit on a liability insurance policy or any business insurance coverage? That’s an excellent question!
While there isn’t necessarily a precise formula to use, there are a handful of factors you should consider. They include:
- Contractual obligations. Third parties often require the companies they do business with to have a specific amount of coverage.
- The size of your business. Larger companies typically require higher insurance limits to protect against losses.
- The type of work you do. Companies in high-risk industries are likely to experience more incidents, so they typically choose higher insurance limits.
- Your business location. The frequency of severe weather, the crime rate, and other factors can increase your risk of having a claim, so you should consider them in setting your insurance limits.
- The value of your assets. It’s crucial that your insurance limits are high enough to cover the cost of replacing or repairing whatever it is the policy covers. Any replacement or repair cost above your limits will be your responsibility.
- Your company’s liability exposure. This requires more of an estimate. Are companies like yours frequently sued? If so, what’s the average value of the damages awarded? Try to find as much information as you can to guide your decision.
- Any legal requirements. Some states, counties, or cities set minimum limits for various types of insurance. Be sure you understand your obligations to avoid legal consequences.
Get advice on policy limits from biBerk.
You’re an expert in running your business but not necessarily insuring it. That’s why supporting business owners like you is our top priority!
If you have questions about insurance limits, deductibles, or premiums, our friendly licensed insurance experts are happy to answer them. And by reading this article, you’ve set yourself up for a very productive conversation.