Decoding Policy Jargon: Sublimits of Liability
Sublimits are the maximum your insurance company will pay for specific losses. Learn what sublimits are, why they exist and how you can work with them.
What are sublimits?
Sublimits are restrictions on how much coverage you have for certain types of losses. Every policy has sublimits baked into its language. Sublimits decrease your coverage by specifying how much the insurer will pay for a specific claim.
Most policies have sublimits. These include commercial property, general liability, professional liability, directors and officers (D&O), and cyber liability policies.
Why do sublimits exist?
Sublimits exist to limit an insurance company’s risk exposure to unquantifiable, unusual or extreme losses they’ll have to reimburse after a claim. Business contents and belongings differ by client, so an off-the-shelf policy can’t account for everything.
Instead, insurance companies limit how much they’ll insure as part of a standard policy. These limits are below the other limits, hence the term “sublimits.” By capping these amounts, insurance companies can keep premiums at reasonable levels for standard coverage.
How do sublimits affect insurance coverage?
You can increase your sublimits by requesting more coverage for high-priced items or major liability exposures. Here are some examples of how sublimits work:
Property
Commercial property insurance covers your business property up to a specific limit. However, sublimits apply to expensive business property items like collectible artwork or computer equipment. If your business has collectible works of art in the client waiting area, you’d need to insure them separately.
Income replacement
A business interruption (BI) policy replaces lost income after your business suffers direct physical damage. If your office is damaged by a tornado, you’ll need business income replacement to help with lost revenue while it’s being restored.
BI sublimits are time-related or “time element” loss limitations rather than dollar amounts. Although there’s no dollar amount, the policy trigger includes a “waiting period” and “period of restoration.” Both act as sublimits. Standard BI coverage makes you wait 48 to 72 hours before it will begin reimbursing lost income. It also limits how long you can get reimbursed after a loss, usually 14 to 30 days.
Talk to your agent if you want to extend your “period of restoration” sublimits. They can also help you add coverage for nonphysical damage events, like forced shutdowns.
Cyber liability
Cyber liability policies have multiple sublimits. Most cyber liability insurance policies are custom or “bespoke.” You pick your limits and coverages. These customizations can range from how much coverage is available for notifying parties after a data breach to court attendance costs.
Some cyber policies get as granular as listing separate sublimits for incidents like phishing or social engineering scams. Understand how the insurance company defines these events so you’ll know what’s covered.
Remember, almost every policy has sublimits. These examples aren’t an exhaustive list.
An example: cyber deception and transfer fraud
Let’s say you have a cyber liability policy with $1 million in privacy liability insurance. Your company’s network has been breached, but you don’t know yet. The cyberattackers are inside your systems, gathering intelligence on your email networks. They’ve already done their homework and targeted several high-ranking executives. They know who they are and how to create a convincing email that sounds like them. They even use a simulator to spoof their voices if employees call directly to verify transactions.
Your senior accountant gets an email from the CEO asking them to transfer $545,000 to a trusted vendor’s account. It looks legitimate. It’s not unusual for the CEO to ask for transfers like this at the end of the fiscal year. The accountant authorizes the transfer. By the time you’re aware of the deception, the cybercriminals are long gone with your $545,000.
You call your agent to start a claim against your cyber liability policy. You have $1 million in coverage.
Unfortunately, that’s when you discover the $250,000 sublimit on “cyber deception,” or social engineering. Your policy defines cyber deception as someone who deliberately tricks you through false information presented within a text message, email or phone call, and you trust it as if it were true.
This fund transfer fraud is classified as cyber deception. Your policy will only reimburse you to $250,000. That leaves you with a $295,000 out-of-pocket loss.
This is one example of how a sublimit can hinder your coverage. Once you understand the sublimits of your policies, you can use the following tactics to improve them.
How do you extend sublimits?
Sublimits can get tricky, but you have options to change them:
- Negotiate a higher sublimit. This modifies your policy and increases your premium.
- Acquire a different policy that covers the risk more thoroughly.
- Buy insurance policies with sublimits closer to your liability exposure.
Call your broker
Now that you know how sublimits work, call your broker for a coverage review. They’ll help you find cost-effective, comprehensive solutions to the gaps sublimits can create.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.