What is the purpose of an aggregate limit in insurance?

The purpose of an aggregate limit in insurance is to cap the total payout for all claims during a policy period. This limit serves as a safeguard for insurers, ensuring that they do not face unlimited financial exposure for claims that may occur over the duration of the policy. By establishing an aggregate limit, both the insurer and the insured have a clear understanding of the maximum amount the insurer is obligated to pay for all claims combined within a specified timeframe, typically a year.

This limitation provides a level of predictability in financial planning for both parties. It helps insurers manage their risk and reserve calculations, while insurance buyers can assess the adequacy of coverage for their specific needs. The aggregate limit is particularly relevant in commercial insurance policies, where multiple claims might be filed over a single policy term, ensuring that the insurer's liability is contained.