What Are Limits of Liability?
When you buy any insurance policy—including professional liability insurance policies—you’ll have to select “limits of liability” for your coverage. These “limits” (sometimes also referred to as “limits of insurance”) are just what they sound like: they are the most your insurance company will pay on a claim or claims covered by a policy. Not surprisingly, the higher the limits, the higher the premium, or cost, of the policy.
When you buy insurance coverage for your home, the “limits” of the policy are usually equivalent to the value of your property and its contents. Selecting professional liability limits is not this straightforward, however. This article breaks down how to understand the limits options available to you as a professional, how limits might or might not apply to a covered claim, and what to consider when choosing the right limits for your policy.
Each Claim v. Aggregate Limits of Liability: What’s the Difference?
The first and most basic thing to understand about limits of liability is that your policy will most likely contain two types of limits: an “each claim” or “each occurrence” limit and an “aggregate” or “policy” limit. A common limit of liability structure for professional liability policies for small businesses is $1 million per claim and $3 million aggregate (often expressed as “$1M/$3M”), but most carriers will offer additional options.
The ‘Each Claim’ Limit in Claims-Made Policies
The “each claim” limit operates to contain the total insurance payout for any single claim or lawsuit. For example, if you are a physical therapist with an insurance policy with limits of $1M/$3M, and you are sued by two different patients claiming injury resulting from equipment in your clinic that you failed to properly maintain, there would be coverage up to $1 million for each lawsuit. If the first lawsuit results in covered expenses and damages of $100,000, it would be fully covered because it is less than the $1 million each claim limit. If the second lawsuit results in covered expenses and damages of $1.1 million, the policy would only pay $1 million, and you would be responsible for paying the remaining $100,000.
The ‘Each Occurrence’ Limit in Occurrence Policies
If you have an occurrence-based policy, this limit will be expressed as the “occurrence” limit and operates to contain the total payout for any one incident or occurrence (including all related occurrences), no matter how many claims arise from that event. Using the same physical therapist example, your failure to maintain equipment could be considered a single “occurrence,” which means that you would only have $1 million available for all claims resulting from that failure. Thus, the two claims resulting in $1.6 million of expenses and damages might only be covered up to $1 million under your policy. Note that the determination of whether one or more occurrences took place in this example would be a legal issue, driven by the specific facts of your situation and the laws of the state you’re in. If another patient is injured and sues you for a completely different type of incident, the full “occurrence” limit would be available for that claim, even though the limit for the “failure to maintain equipment” claim has already been reached.
Regardless of whether you have a claims-made or occurrence policy, however, the $3 million aggregate limit operates to cap the total payout to $3 million per policy period, regardless of the number of claims, incidents, occurrences, or patients.
What Do Limits Cover, Anyway?
Your limits of liability always apply to covered “damages”—or those amounts you’re obligated to pay—to compensate the injured party in a claim. Typically, damages are awarded by a judgment in court or agreed to through a settlement with the claimant. Damages are intended to compensate the claimant for their injuries or losses and correlate most with the severity of the injury or loss. In the PT example previously discussed, the $100,000 claim might have compensated a patient who was only mildly injured for their medical bills and the cost of any additional care needed to recover. The $1.1 million claim would be more likely to have resulted from a patient’s injuries being more severe or permanent. Note that “damages” as defined in the policy usually do not cover things like reperforming your services (e.g., “10 free sessions” to fix the mistake). Moreover, many states prohibit insurance companies from offering coverage for “punitive” damages, which are payments designed to deter and punish certain conduct, and are separate from compensating claimants from the harm they actually suffered. Read your policy thoroughly to understand what is included within the “damages” definition.
Additionally, your professional liability policy will also apply to the cost of defending claims, such as hiring an attorney, investigating the facts, or hiring experts. These are known as “defense costs” or “claim expenses.” How your limits of liability apply to these types of costs is an important feature. If the defense costs are paid “outside” the limits of liability, that means that the attorneys’ fees do not count against your limits. Let’s say that the $1.1 million PT claim comprised $200,000 in defense costs and $900,000 in damages. If your policy paid defense costs outside the limit, the $1.1 million would be covered in full ($900,000 in damages within the $1 million limit, and defense costs are paid in addition to that amount without impacting the limit). However, if the policy paid defense costs within the limit, then your insurance would only cover $1 million total: $200,000 in defense costs, leaving only $800,000 available to pay damages. You would be on the hook for the last $100,000. Read your policy carefully to understand how defense costs are paid. This information is usually found in the “Limits of Liability” or “Limits of Insurance” provision of your policy.
Special Considerations for Professionals
There's no magic number for limits of liability that will protect professionals against all possible liability scenarios. You can certainly decide to purchase the highest available limits, but that will also be the most expensive level of coverage and may not be what is best for you. But, if you go for the least expensive option, you risk not buying enough coverage for your particular professional situation. In selecting your professional liability policy limits, it’s important to consider the following factors: industry practice among similar professionals, tort reform in your state, and your specific exposure or personal situation.
- First, consider what other professionals in your role and type of employment are buying. Ask your local or regional professional association for guidance. Most likely, the insurance that is most commonly purchased in your area represents common wisdom and experience over the years and may make sense to follow suit.
- Second, learn whether your state or city has tort reform that will protect you from “runaway juries” or excessive judgments. Especially in medical malpractice, many local laws try to manage the litigation environment through “caps” on what damages a plaintiff can receive from a lawsuit. The intent of such caps is primarily to prevent losing healthcare providers unwilling to take the risk in overly litigious or expensive jurisdictions. If your state or city has passed tort reform laws, find out whether there is a cap on damages, as you may not need to buy coverage above that cap.
- Finally, if you’re a self-employed professional or own your own business, you will likely be on your own in defending claims. There will be no employer-provided coverage on the front line protecting your finances. Even if you have a contract with a company that promises to indemnify you, buying full coverage up to your industry standard and geographical needs is probably a good idea, as you may still need to tap into your own coverage first to secure a proper defense.
Ready to take the next step toward protecting your career? Take a look at our suite of professional liability insurance products to learn more.