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South Dakota Municipal League

Understanding Your Coverage Limits and Options
Friday, July 22, 2016

By Paytra Nichols, Underwriter, SDPAA

A question we often receive during coverage reviews or during the renewal process is, “Do we have enough coverage in place?” or “How much liability coverage do we need?” The answer to this question is different for each Member. Often during coverage discussions, we are asked about the potential need for an umbrella policy. In order to make an informed decision regarding an umbrella policy, you will need to understand how an umbrella policy works. In addition to understanding what an umbrella policy is, it is important to know if your policy has an aggregate limit and what that limit is.

Often entities are aware of their per occurrence limit but do not know what their aggregate limit is, or what an aggregate limit means. The per occurrence limit on a liability policy is the maximum that will be paid out for any one occurrence. The policy aggregate limit is the maximum that will be paid out in any given policy period. For example, if the policy has an aggregate limit of $2,000,000 and there are two claims during the policy period that equal $1,000,000 each, the aggregate limit has now been exhausted. Once the aggregate limit has been exhausted, the policy will no longer pay out any claims. Coverages through SDPAA do not have aggregate limits. This means that there is no maximum amount that will be paid out during a specific policy period. The only limit is the per occurrence limit, which limits the amount that will be paid on an individual occurrence.

The other question we need to answer is, “What is an umbrella policy and how does it work?” An umbrella policy is a type of excess liability policy. It provides a second layer of coverage for all underlying liability policies. For example, if a liability policy has a $1,000,000 per occurrence limit and an individual claim reaches this limit, the umbrella policy will come into play to pay expenses above and beyond the per occurrence limit of $1,000,000, up to the umbrella policy limit. In addition, you need to know that the umbrella policy will have a SIR (self-insured retention). The umbrella SIR is separate from the deductible on the underlying liability policy. The umbrella policy could also pay out when an underlying policy has reached its aggregate limit. Umbrella policies often have an aggregate limit as well, which will limit the amount that can be paid out during the umbrella policy period. Again, one of the benefits of the SDPAA coverage is that there are no aggregate limits, therefore no umbrella policy is necessary.

It is important to understand what coverages you have in place and how the different limits and coverages work. The SDPAA Member Services Department is available and always willing to do a policy review at any time to assist you and answer any questions you may have regarding your coverage. In addition, the SDPAA staff is available to answer any questions. Please contact our office at 800.658.3633 to set up a time to complete a policy review or for any assistance.

208 Island Drive - Ft. Pierre, SD 57532 - 605.224.8654