How excesses & sub-limits can reduce your insurance protection

How excesses & sub-limits can reduce your insurance protection

Most business owners understand exclusions. If a risk is excluded, the position is clear: the policy will not respond. More complex, and often less scrutinised, are situations where cover technically exists, yet the structure of the insurance policy significantly limits the practical financial benefit.

In these cases, the interaction between sub-limits and excesses can materially reduce the level of protection available at claim time. On paper, cover is provided. In practice, the retained exposure may remain largely with the business.

When a sub-limit mirrors the excess: how it affects policy coverage

A sub-limit is a defined cap that applies to a specific section or category of claim within a broader policy. It restricts the maximum payable amount for that particular exposure, even if the overall policy limit is substantially higher. An excess is the amount the insured must contribute before the insurer indemnifies the loss. Both mechanisms are standard underwriting tools. However, when a sub-limit and an excess are aligned at similar levels, the financial transfer of risk under the policy may be significantly reduced.

Consider a healthcare provider whose policy includes molestation liability cover. The policy does not exclude these claims. However:

• The sub-limit for molestation claims is $20,000.
• The applicable excess for that section is $20,000.

While the policy responds in principle, the business effectively retains the entire financial exposure.

[Further reading: The most common reasons insurance claims get rejected.]

Why sub-limits and excesses exist in insurance policies

Certain exposures are inherently difficult for insurers to price, either because they are unpredictable, carry potentially high costs, or occur infrequently but with severe consequences. To manage these risks, policies often include sub-limits combined with proportionally high excesses. While cover exists in principle, the financial protection may be materially limited in practice.

For instance, cyber policies frequently provide sub-limited coverage for incident response costs, such as system restoration, forensic investigation, and client notification. If the excess applicable to these sections is high, the business may need to fund a substantial portion of the initial response, even though the policy technically responds.

Similarly, extensions for employee dishonesty or internal fraud can carry low sub-limits with high excesses. A medium-sized business may hold cover for employee dishonesty, but if the sub-limit is close to the excess, any actual recovery from the insurer may be minimal. These structures allow insurers to provide broader categories of coverage while maintaining pricing and risk discipline, but they also highlight the importance for businesses to carefully assess the practical level of protection offered.

How to assess the real level of protection in your insurance policy

The existence of a coverage section in a policy schedule does not, in isolation, confirm meaningful protection. Businesses should evaluate:

• The size of the sub-limit compared with the likely cost of a claim
• The level of excess applicable to that section
• Whether defence costs erode the sub-limit
• Whether excess applies per claim, per claimant or per event
• The potential cumulative effect of multiple claims within an insurance policy period

If the excess absorbs most of the sub-limit, or if the sub-limit is materially below the likely cost of a claim, the retained exposure may remain substantial.

[Further reading: Are Your Sums Insured Up to Date?]

Ensuring your insurance policy provides real risk transfer

The primary function of insurance is to transfer risk from the balance sheet of the business to the insurer. Where sub-limits and excesses are structured in a way that leaves the majority of exposure with the insured, the policy may satisfy contractual or regulatory requirements without delivering substantive financial protection. A comprehensive policy review should therefore consider not only whether cover exists, but whether the structure of that cover provides meaningful risk transfer.

How Coverforce can help

Coverforce works with businesses to provide expert guidance on insurance, helping you understand your coverage and make informed decisions. We assist in identifying potential exposures, ensuring your policy coverage aligns with your business needs and risk profile. Whether you're reviewing your existing insurance or arranging new cover, our team is ready to provide guidance.

Get in touch today to speak with one of our experienced brokers.

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