What do limits of liability refer to in insurance?

Limits of liability in insurance specifically denote the maximum amounts an insurance company will pay for a covered loss under each type of coverage outlined in the policy. These limits are established at the time the insurance contract is made, and they serve to protect both the insurer and the insured by clearly defining the extent of financial responsibility.

Having limits of liability allows the insurer to manage their risk by capping potential payouts and helps the insured understand the maximum financial protection they can expect to receive for claims. For instance, if a policyholder has a liability insurance limit of $500,000, this means that the highest amount the insurer would pay for a liability claim would be $500,000, regardless of the total costs involved.

Understanding limits of liability is crucial for both agents and insured parties, as it can impact decisions on purchasing coverage, adjusting limits based on risk, and evaluating overall insurance needs.