If you are in the market for professional liability insurance, you have probably noticed a lot of confusing terminologies. It is sometimes difficult to weed through the lengthy jargon to find the insurance you need. For example, do you need a standard per claim deductible or an aggregate deductible?
An aggregate deductible can save you money, but it depends on your unique situation. In this guide, we will cover everything you need to know about an annual aggregate deductible, including what it means, how it works, and whether it is the best option for your business.
The Definition of an Annual Aggregate Deductible
An aggregate annual deductible places a limit on the amount you (the policyholder) pay before the insurance company covers the rest of the loss.
A basic deductible applies to each claim you file. If your deductible is $1,000, for example, you will pay $1,000 for each claim you file before the insurance company pays its share. With an aggregate deductible, you will only pay one deductible amount for the entire policy period, which is usually a year. This aggregate deductible applies whether you file one claim or several claims. However, the deductible is usually higher than a per claim deductible.
This helps save money if you experience a lot of claims throughout the year.
How An Aggregate Deductible Applies to Professional Liability Insurance
Aggregate deductibles are especially helpful when you are purchasing professional liability insurance, particularly if you need additional protection from a large number of claims.
When you have an annual aggregate deductible on your professional liability insurance policy, you will have one deductible for the entire year, no matter how many claims you have.
Examples of an Aggregate Deductible
So, for example, let's assume you are a bankruptcy attorney, and your assistant misplaces paperwork without your knowledge. As a result, it is never filed properly with the court, and your clients suffer financial losses. This leads to five separate lawsuits for $50,000 each.
You have a per claim deductible of $5,000, so you pay a total of $25,000, and the insurer pays the remaining $225,000 of claims. If you have any other claims that year, you will also pay a per claim deductible for each one you file.
However, if you have an aggregate deductible of $5,000, you will only pay $5,000 total for all five claims. The insurer pays the remaining $245,000. If you have any additional claims that year, you won’t pay anything because you’ve already met your annual aggregate deductible.
As another example, assume you are a tax attorney, and your tax software led to a simple error on a large number of personal returns you processed. This resulted in additional fees and expenses for your clients, and you have 50 claims against your liability insurance. The claims average $10,000 each.
You have a standard deductible of $2,000 per claim, so you will pay a total of $100,000 for these claims while your insurer pays the remaining $400,000. You will also pay $2,000 for each additional claim you file that year.
If you have an annual aggregate deductible of $10,000, you will only pay a total of $10,000 for all of the claims. The insurer pays the remaining $490,000. You won’t pay anything for any additional claims you file that year because you’ve already met your annual aggregate deductible.
In both of these examples, the aggregate deductible option saves the policyholder a significant sum of money. As you can see, the higher the loss and the lower the aggregate deductible, the more you will save with an aggregate deductible.
How An Aggregate Deductible Affects The Price of Insurance
Typically, your insurance premium is higher when the insurer’s financial risk is higher, and vice versa.
Keeping that in mind, a standard $2,000 deductible policy is usually less expensive than a $1,000 deductible policy because you’re expected to cover more of the loss with each claim.
This is also true when you have an aggregate deductible. Because your expected financial loss each year is lower, you can expect to pay a higher premium.
The premium varies depending on your profession and numerous other factors, but it is usually around 5 percent of your base premium.
Who Needs an Aggregate Deductible
An aggregate deductible isn’t always a good idea, but it can save you a lot of money if you carry a high risk of claims each year.
If you only carry professional liability insurance as a “worst-case scenario” protection and your line of work carries a low risk when it comes to insurance claims, a standard deductible is a better option. If you opt for an aggregate deductible, you will pay a higher premium but likely won’t ever see the savings advantages of this option.
If, however, you have a high risk of financial loss and usually have several claims within a policy period, an annual aggregate deductible may be the better option. While you will pay a higher premium, you will pay less when those claims hit throughout the year.
There are many things to consider when you are looking for the best professional liability insurance for your business. An aggregate deductible is just one small piece of the puzzle. If you have any questions or need further assistance, we have a list of terminology to help you wade through the sea of insurance jargon.