What is aggregate limit erosion and why should law firms care?

Every malpractice policy has two limit components: the per-claim limit and the aggregate limit. The per-claim limit is the maximum the carrier will pay for any single claim, while the aggregate limit is the maximum the carrier will pay for all claims combined during the policy period. In a typical $1 million per claim and $2 million aggregate policy, the firm has $1 million available for any individual claim but only $2 million total for the year. If two claims each exhaust the $1 million per-claim limit, the aggregate is fully consumed, and any subsequent claims during that policy year receive no coverage.

Aggregate erosion is particularly dangerous when defense costs are included within the policy limits, as most legal malpractice policies provide. In this structure, defense costs reduce both the per-claim limit and the aggregate limit. A claim that generates $300,000 in defense costs and settles for $500,000 consumes $800,000 of both the per-claim and aggregate limits. If the firm has multiple open claims, defense costs across all matters simultaneously erode the aggregate.

To protect against aggregate erosion, consider several strategies. First, purchase higher aggregate limits relative to your per-claim limit, such as a $1 million per claim and $3 million aggregate structure instead of the standard $2 million aggregate. Second, explore policies that offer defense costs outside of limits, which preserves the full stated limits for indemnity payments. Third, consider a commercial umbrella or excess policy that provides additional limits above your primary malpractice coverage.

Monitor your aggregate throughout the policy year. If you have open claims that are consuming defense costs, track the remaining aggregate and consider whether a mid-term limit increase is necessary to maintain adequate protection for the remainder of the policy period. Your broker can assist with aggregate tracking and advise on options if erosion becomes a concern.