Coverage limits: Overview, definition, and example
What are coverage limits?
Coverage limits refer to the maximum amount an insurance policy will pay out for a covered loss or claim. These limits are specified in the policy and set the upper boundary for the insurer’s financial responsibility. Coverage limits can apply to various types of coverage, such as liability, property damage, medical expenses, or other risks depending on the type of insurance (e.g., health, auto, home, or business insurance).
For instance, an auto insurance policy might have a liability coverage limit of $100,000 per person and $300,000 per accident, meaning the insurer will pay up to $100,000 for injuries to a single person involved in an accident and up to $300,000 in total for all injuries resulting from the same accident. Once the limit is reached, the policyholder would be responsible for any additional costs.
Why are coverage limits important?
Coverage limits are important because they define the scope of financial protection provided by an insurance policy. These limits ensure that both the insurer and the insured are clear on the maximum amount of coverage available in the event of a claim. Understanding the coverage limits is crucial for policyholders to assess whether they have sufficient protection for their needs and whether additional coverage or higher limits are required.
For businesses or individuals, coverage limits help determine potential out-of-pocket costs in the event of a claim that exceeds the policy limits. In some cases, policyholders may need to consider purchasing additional insurance or an umbrella policy to increase their protection.
Understanding coverage limits through an example
Imagine a homeowner purchases homeowners insurance with a coverage limit of $200,000 for property damage. A fire breaks out and causes $250,000 worth of damage to the home. Because the coverage limit is $200,000, the insurance company will only pay up to that amount, and the homeowner would be responsible for the remaining $50,000.
In another example, an auto insurance policy has a liability coverage limit of $300,000. If the policyholder is found at fault in an accident that results in $400,000 in medical bills and property damage, the insurance company would cover the first $300,000, leaving the policyholder responsible for the remaining $100,000.
Example of coverage limits clause
Here’s what a coverage limits clause might look like in an insurance policy:
“The insurance coverage provided under this policy shall be subject to the following limits: $500,000 per person for bodily injury, $1,000,000 per accident for bodily injury, and $250,000 for property damage. The maximum amount payable for any claim shall not exceed these limits, and the policyholder shall be responsible for any amounts exceeding these limits.”
Conclusion
Coverage limits are a fundamental component of insurance policies that define the maximum amount an insurer will pay out in the event of a claim. These limits help both insurers and policyholders understand the extent of financial protection provided and the potential out-of-pocket costs if a claim exceeds the policy’s coverage.
For individuals and businesses, understanding coverage limits is essential to ensure that they have adequate insurance protection for their needs. If necessary, policyholders can seek additional coverage or higher limits to enhance their protection and reduce the risk of significant financial exposure.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.