What is a "policy limit"?

A "policy limit" refers to the maximum amount an insurer will pay for a covered loss as specified within an insurance policy. This limit is crucial because it delineates the extent of the insurer's liability. For instance, if a policy has a limit of $100,000, the insurer is obligated to cover losses up to that amount for any claims made under the policy. If the damages exceed this limit, the insured would be responsible for the excess amount.

Understanding policy limits is essential for policyholders as it guides their decision-making when purchasing insurance. It allows them to assess whether the coverage is adequate for their potential risks. Knowing the policy limit also helps claim adjusters determine the payout during the claims process and assists in advising clients on possible policy adjustments if they are underinsured. This makes the concept a foundational element in insurance contracts and claims management.