How does an "aggregate limit" function in insurance policies?

An aggregate limit refers to the maximum amount that an insurance policy will pay for all covered losses during a specified period, usually one policy year. This means that if multiple claims are made within that time frame, the insurer will not pay more than the predetermined aggregate limit for all those claims combined.

For instance, if an insurance policy has an aggregate limit of $1 million, and the insured experiences several incidents resulting in claims that total $1.2 million, the insurer will only pay out up to that $1 million limit, regardless of the number of claims made. This mechanism is essential for insurers to manage their risk exposure and ensure they do not face unlimited liability for claims made within the policy period.

Understanding the concept of an aggregate limit is crucial for policyholders, as it defines the overall cap on what they can expect to receive in the event of multiple losses, guiding how they assess their risk and insurance needs.