What Is Per Occurrence Limit in Insurance?

Insurance policies contain various limitations on how much an insurer will pay for covered losses. These policy limits define the maximum financial protection provided by the coverage. A “per occurrence limit” sets a cap on payouts for individual events. Understanding these limits helps policyholders manage their financial responsibility in the event of a claim.

Understanding the Per Occurrence Limit

A per occurrence limit represents the maximum amount an insurance company will pay for all damages or losses arising from a single incident. This limit applies regardless of the number of individuals affected or the types of damage incurred from that specific event. The term “occurrence” is broadly defined, referring to an accident, including continuous or repeated exposure to harmful conditions that ultimately lead to injury or property damage. For instance, if a business faces a lawsuit stemming from a single event, the per occurrence limit dictates the highest amount the insurer will pay for all related claims from that incident.

How the Limit Applies to Claims

The practical application of a per occurrence limit becomes clear when considering various claim scenarios. For example, in a general liability policy, if a customer slips and falls in a retail store, sustaining injuries, and sues the business for $750,000, and the policy has a $1 million per occurrence limit, the insurance would cover the entire amount, minus any deductible. However, if the same incident resulted in multiple injured parties and combined damages totaling $1.5 million, the insurer would only pay up to the $1 million per occurrence limit, leaving the business responsible for the remaining $500,000.

Consider a professional liability policy for an architectural firm with a $500,000 per occurrence limit. If a design flaw causes structural damage to a building, affecting several property owners and resulting in total claims of $800,000, the policy would cap its payout at $500,000 for that single design error. The architectural firm would then be liable for the $300,000 difference. In auto liability insurance, if a driver causes an accident that injures three people and damages two vehicles, and the policy has a $100,000 per occurrence limit for bodily injury and property damage combined, the total payout for all medical bills and repair costs from that one accident would not exceed $100,000. In all these cases, any amount exceeding the per occurrence limit becomes the policyholder’s financial responsibility.

Distinguishing from the Aggregate Limit

The per occurrence limit differs from the aggregate limit, as both are components of many insurance policies. While the per occurrence limit caps the payout for each individual incident, the aggregate limit represents the total maximum amount an insurer will pay for all covered losses within a specific policy period, typically one year. This means that even if multiple occurrences each fall within the per occurrence limit, the cumulative total paid out over the policy term cannot exceed the aggregate limit.

For instance, a commercial general liability policy might have a $1 million per occurrence limit and a $2 million aggregate limit. If a business experiences two separate incidents in a year, each causing $750,000 in damages, the insurer would pay $750,000 for the first incident and $750,000 for the second, totaling $1.5 million against the aggregate limit. If a third incident later that year also caused $750,000 in damages, the insurer would only pay $500,000 of it. This is because the total payout would then reach the $2 million aggregate limit, leaving the business responsible for the remaining $250,000 from that third claim. The aggregate limit acts as an overarching cap on the insurer’s total liability for the policy term, regardless of how many individual occurrences take place.

Choosing the Right Per Occurrence Limit

Selecting an appropriate per occurrence limit requires assessing several factors to ensure adequate protection. Policyholders should assess the potential maximum severity of a single incident that could occur based on their activities or operations. This involves evaluating the likelihood of a high-cost event, such as a major accident or significant property damage.

Industry standards and contractual requirements may also mandate specific liability limits, especially for businesses. For example, some contracts may require a minimum per occurrence limit of $1 million or $2 million. The chosen limit should align with the policyholder’s personal financial exposure and their ability to absorb costs exceeding the insurance payout. Opting for a higher per occurrence limit translates to greater financial protection and helps safeguard assets in the event of a substantial claim.