Commercial General Liability Limits Explained
When deciding what general liability limits to purchase, you should consider how much coverage you need to sufficiently protect yourself from lawsuits and weigh that against the most amount of coverage you can get for your money. Understanding how limits work, where gaps in coverage exist, and when you should increase your limits can help you achieve this balance.
GENERAL LIABILITY LIMITS DEFINED
General liability insurance limits include:
- Per Occurrence Limit – The maximum amount the insurance company will pay for one claim
- General Aggregate Limit – The maximum amount the insurance company will pay for all claims during the policy period
- Products-Completed Operations Aggregate – The aggregate limit specifically for claims involving your products or completed work
- Personal & Advertising Injury Limit – This limit is usually the same as the per-occurrence limit
- Medical Payments Limit – This is a small sublimit that pays for minor injuries regardless of fault
The most common general liability limits are written:
- $1,000,000 per occurrence / $2,000,000 general aggregate
But these limits won’t typically cut it for most industries.
LEARN MORE: General Liability Insurance
WHY YOU NEED MORE THAN GENERAL LIABILITY LIMITS
General liability policy limits are not enough coverage to protect your business from catastrophic losses. You should consider worst case “what-if” scenarios and choose limits that provide adequate coverage for those risks.
Consider things like:
- Contractual indemnification language
- Contracts with broad hold-harmless provisions
- Large judgments and legal defense costs
Commercial Umbrella Coverage
You can buy a commercial umbrella policy that provides excess liability coverage over your general liability limits.
- This insurance provides one or more layers of coverage above your underlying policy
- Umbrella insurance is used to cover catastrophic losses (think: multi-million dollar lawsuits)
- Some policies can “drop-down” and provide coverage when underlying limits are exhausted
Make sure you understand:
- Whether your defense costs are paid inside (less favorable) or outside your limits
- What is and is not covered under the umbrella (professional services, cyber, etc.)
- How much underlying coverage you are required to maintain
LEARN MORE: Commercial Umbrella Insurance
EXCESS LIABILITY LAYERS
In addition to umbrella insurance, you can purchase excess liability policies.
Excess liability policies provide:
- Additional limits of liability directly above your general liability policy
- Coverage that typically “follows form” of the underlying policy
Note the differences between:
- Per occurrence excess policies vs aggregate excess policies
- Self-insured retention amounts (SIR) versus a deductible
- Maintaining consistency when using multiple excess carriers
Laddering multiple layers of excess liability insurance is one method of affording larger limits of insurance such as:
- $5M, $10M, or even $25M+ total limits
…but be sure the terms match or you can create unforeseen coverage gaps.
DROP DOWN COVERAGE
Your general liability limits don’t magically replenish during the policy period. Once you use insurance, that limit is reduced until the policy expires.
HOW LIMITS ARE ERODED
When your policy’s limits are reduced by claims, settlements, and payments is known as limit erosion.
Defense Costs Inside vs. Outside of Limits
If your insurance policy pays legal defense costs out of your insurance limits, then every dollar paid in defense costs is one less dollar you have to pay a settlement or award.
- When defense costs are INCLUDED in your limits, they will reduce your ability to pay claims
- When defense costs ARE PREMIUMED OVER (paid outside of your limits), they will NOT reduce your ability to pay claims
It’s best when your defense costs are PREMIUMED OVER.
Multiple Claims
If you have back-to-back losses, your general aggregate limit can be wiped out quickly leaving you unprotected.
- Keep track of claims and maximum potential severity
- Monitor your aggregate limit being eroded throughout the policy term
- Increase your limits if your exposure increases
Regular Policy Reviews
Just as your business should grow every year, your insurance coverage should grow as well.
- Perform an annual coverage review to ensure classifications such as payroll and revenue are accurate
- Increase limits to account for growth
- Catch any mis-underwriterings
Grow Your Limits
Anytime your business:
- Increases revenue
- Takes on larger projects
- Expands into new markets
…you should increase your general liability limits as well.
HOW TO SELECT LIMITS
You should choose general liability limits that are high enough to protect you from significant lawsuits.
When deciding what limits you need, ask yourself:
- What industry do you operate in? (Professional services carry higher risk)
- What are your contracts requiring?
- How much could you really afford to lose?
- Do you have a history of being sued?
- How many people come into contact with your business?
How Much Is Enough?
- Most small businesses can get by with: $1M / $2M
- Mid-range risk: $2M / $4M + Umbrella
- Higher risk industries: $5M–$25M of total coverage (when using excess)
EXCEEDING YOUR LIMITS
If you’re sued for more money than you have in insurance coverage, your insurance company will only pay up to your limits.
The remaining amount you owe will be your responsibility (either personally or corporately).
This could lead to:
- Being sued for the remainder of the award
- Loss of assets/liens
- Cash flow issues/bankruptcy
POLICY ENDORSEMENTS
Policy endorsements can remove, restrict, or add coverage to your insurance policy.
Some policies may include endorsements that impact your limits, such as:
- Per-project aggregate (standard for contractors)
- Additional insured
- Waiver of subrogation
- Primary & non-contributory
Always read the endorsements on your policies. Relying on CO’s alone is risky.
VERIFYING LIMITS FOR CONTRACTS
To ensure you have enough coverage to satisfy a contract, you should:
- Request a certificate of insurance
- Follow-up with requesting copies of actual endorsements
- Confirm the following information is correct:
- Limits
- Policy period
- Required wording
Certificates of insurance are NOT proof of coverage. They are simply a “representation” of insurance.
Recap
- General liability limits may not be enough coverage to protect you from a catastrophic loss
- Umbrella and excess liability policies are necessary to protect yourself from multi-million dollar claims
- Having defense costs paid inside of your limits will deplete your coverage much quicker
- Perform annual reviews to ensure your coverage grows with your business
TL;DR
You should treat liability insurance limits as you would any other form of financial protection. Because just one lawsuit could cost more than your minimum required general liability coverage all in one day…
Frequently Asked Questions
What are general liability limits?
A: General liability insurance limits refer to the maximum amount an insurer will pay per claim and the total amount they will pay during the policy period.
Limits can include:
- Per occurrence
- General aggregate
- Products completed operations aggregate
- Personal & advertising injury
How do I know what limits I should buy?
A: You should buy as high a limit as you can afford, and that makes sense for your industry risk. Most professionals should have an umbrella policy (examples: doctors, lawyers, architects).
What happens if I am sued for more than my limits?
A: You would be responsible for the remaining amount out of pocket, which could lead to personal bankruptcy.
How do umbrellas and excess insurance help?
A: Umbrella and excess layers give you more coverage above your general liability policy