Which statement correctly describes the function of 'coverage limits'?

The statement that defines the function of 'coverage limits' as establishing the maximum amount an insurer will pay for covered losses is accurate. Coverage limits are essential components of insurance contracts that specify the dollar amount that can be claimed under various circumstances. This means that if a policyholder experiences a covered loss, the insurer is legally obligated to pay up to the predetermined limit specified in the policy.

Understanding coverage limits is crucial for both policyholders and insurers, as they help manage expectations regarding potential payouts and assist in risk assessment. For policyholders, knowing the coverage limits ensures they have adequate protection for their assets without being underinsured. For insurers, these limits help control risk exposure and determine pricing for coverage.

In contrast, the other options do not accurately reflect the function of coverage limits. Describing coverage limits as fees, number of claims, or underwriting criteria creates confusion about their primary role, which is centered on liability and payout specifications in response to claims.