Limit of Indemnity
The maximum amount an insurance company will pay for a claim under an insurance policy.
What is Limit of Indemnity in Insurance?
A Limit of Indemnity refers to the cap or maximum amount your insurance provider will pay in the event of a claim. This limit is set when you purchase your policy and is designed to protect both you and the insurer. For instance, if you have a policy with a Limit of Indemnity of $1,000,000, the insurer will pay up to this amount for covered losses. Any costs beyond this limit would be your responsibility.
Let’s consider an example:
Imagine you own a small manufacturing business. You have a public liability insurance policy with a Limit of Indemnity of $1,000,000. One day, a customer visits your factory and suffers an injury due to a machine malfunction. The customer files a lawsuit, and the court awards them $800,000 in damages. Your insurance policy would cover the entire amount because it is within the $1,000,000 limit. However, if the court awarded $1,200,000, your insurance would cover up to $1,000,000, and you would need to pay the remaining $200,000.
Key Components of Limit of Indemnity
Understanding the key components of the Limit of Indemnity can help you choose the right coverage for your business needs. Here are the three main components:
Aggregate Limit: This is the total amount your insurer will pay for all claims during the policy period. For example, if your aggregate limit is $2,000,000 and you have three separate claims of $800,000, $600,000, and $700,000, the insurer will cover only up to $2,000,000. Any further claims would not be covered once this limit is reached.
Per-Occurrence Limit: This is the maximum amount the insurer will pay for a single claim or incident. For example, if your per-occurrence limit is $500,000 and a single claim is filed for $600,000, the insurer will only cover up to $500,000, leaving you to cover the remaining $100,000.
Sublimit: This is a smaller limit within the main limit of indemnity that applies to specific types of losses. For example, a policy might have a $1,000,000 limit of indemnity but include a sublimit of $100,000 for legal expenses. This means that even if you have not reached the overall limit, the insurer will only pay up to $100,000 for legal costs.
