What are coverage limits in an insurance policy?

Coverage limits in an insurance policy refer specifically to the maximum amount an insurer agrees to pay in the event of a covered loss. This limit is crucial because it determines the extent of financial protection provided to the policyholder. For example, if a policy has a coverage limit of $100,000 for property damage and the insured suffers a loss that costs $150,000 to repair, the insurance company will only pay up to the limit of $100,000, leaving the policyholder responsible for the remaining costs.

Understanding coverage limits is essential for policyholders so they can assess whether their insurance is adequate for their needs. It also plays a key role in the underwriting process, where insurers evaluate the risk associated with providing coverage to a potential insured.

In contrast, while definitions of coverage and other terms related to premiums or renewal conditions are important aspects of an insurance policy, they do not directly pertain to the financial boundary that coverage limits establish.