Insurance coverage is not unlimited. Yes, the insured can purchase a policy with several million dollars of protection. However, after a certain number of claims and payouts, that collective number would reach its maximum. In turn, coverage is halted. This value is known as an aggregate limit.
Within the industry, the aggregate limit is the maximum amount the insurer will cover during a set period of time. For most companies, this is approximately one year. Still, it can vary by organization and policy.
This is not coverage for one incident. This is a cumulative payout for claims within a certain time period. For instance, a company sets a total coverage limit of $30 million. However, before the policy year ends, they end up with claims that total $40 million.
Since the aggregate limit is set to $30 million, the insurer would only pay that much in damages. The company would need to pay the remaining $10 million out of their own budget.
Aggregate limits don’t just apply to business policies. They are also part of personal insurance contracts for the auto and health sectors. For the latter, the insured might have a limit of $250,000 for surgical care. Should that amount be exceeded, the policyholder would need to either pay out of pocket or appeal the decision back to their insurer.
Due to these aggregate limits, policyholders might purchase a stop-loss rider to cover catastrophic losses. For instance, a fire destroys their office complex. With aggregate limits, their regular liability insurance would only cover a portion of the reconstruction. The stop-loss rider would pick up where the original policy left off to complete the coverage.
A business might also consider stop-loss insurance when it comes to self-funded health plans. Since there is a coverage cap on the regular policy, the company could be significantly hampered if they needed to pay the remainder of payments from its own budget. Stop-loss insurance would allow them to minimize coverage interruption.