What do coverage limits refer to in an insurance policy?

Coverage limits in an insurance policy define the maximum amount that an insurer will pay for a specific loss or set of losses. This means that if a covered event occurs—for instance, property damage, liability claims, or medical expenses—the insurer will only compensate the policyholder up to this predetermined limit. Understanding coverage limits is crucial for both insurers and policyholders because they establish the financial boundaries of protection provided under the policy.

For example, if an individual has a homeowners insurance policy with a coverage limit of $300,000 for property damage and experiences a loss that costs $400,000 to repair, the insurer is only liable to pay up to the maximum limit of $300,000. This helps both parties manage their expectations regarding the extent of coverage and potential out-of-pocket expenses.

By grasping the significance of coverage limits, policyholders can better assess their insurance needs and select coverage amounts that appropriately reflect their risk exposure and financial capacity.