Loss limit policies insure property on an occurrence basis to a limit of the probable maximum loss rather than an actual total property value.
If a manufacturer has ten locations in ten states each valued at three million dollars including contents, the probable maximum loss for a single occurrence might be three million dollars because no one storm, earthquake, or fire will destroy more than one site in a single occurrence.
If all ten locations are within a mile of the east coastline, a hurricane might destroy several plants, producing a probable maximum loss of, for example, nine million dollars rather than thirty million.
In the first case, the policy limit might be four million; in the second, it might be ten million rather than thirty million.
This method of valuation provides insurance for very high-value risks or when some portion of the risk is hard to reinsure.
Reinsurance is a spread-of-risk system for insurers, and reinsurers each have maximum limits per loss. For very high-value risks, it may not be possible to reinsure the total value of property, so insurers use loss limits to manage exposure.
Windstorm, flood, and earthquake hazards can be difficult to insure. Insuring all locations with a single maximum loss is a way to obtain some protection for the entire group of locations.
Loss limit policies tend to be more expensive because total losses are theoretically more likely under occurrence-based limits than under individual-site limits.
Co-insurance became common because many insureds preferred to buy enough insurance for the probable maximum loss on a single property. Loss limit policies can be viewed as broader protection without a co-insurance clause; underwriters price each occurrence with full awareness of the difference between multiple first-dollar losses and a single catastrophic loss.
The principles of spread of risk and actuarial loss prediction remain constant but apply differently when limits are set by probable maximum loss.
For examples of multi-location coverage and how carriers handle grouped exposures, see Condo Multi-Location Property Insurance.
If you have a portfolio of properties spread geographically, with maybe a few in hurricane or earthquake zones, review your loss limit options and valuation approach; for guidance on valuation and related risks see Property valuation, loss-limit insurance, and foreclosure risks.
To compare limits, exclusions, and pricing with an insurer or broker, consider asking for illustrations and then talk to an agent about which structure fits your portfolio.
Frequently Asked Questions
What is "probable maximum loss"?
Probable maximum loss is an estimate of the largest loss reasonably likely to occur in a single insured event for a group of locations, considering geography and hazard correlations.
How does a loss-limit policy differ from standard property insurance?
Loss-limit policies set a maximum payment per occurrence based on the probable maximum loss across locations, whereas standard policies typically insure each property up to its individual value.
Are flood and earthquake losses covered by loss-limit policies?
Coverage for flood and earthquake depends on policy terms and endorsements; those hazards are often limited or excluded unless specifically included.
When should I consider a loss-limit policy?
Consider loss-limit coverage if you have several high-value locations with correlated exposures or when full reinsurance for every location is impractical.