What is a "coverage limit" in an insurance policy?

A "coverage limit" in an insurance policy refers to the maximum amount an insurer will pay for a covered loss. This means that if an insured event occurs and a claim is made, the insurer will provide compensation up to the specified limit outlined in the policy. For example, if a homeowner has a coverage limit of $200,000 for property damage, they would receive a payout for damages up to that amount, but not beyond it. Any costs exceeding this limit would be the responsibility of the policyholder.

Understanding the coverage limit is essential for insured parties, as it helps them assess whether their coverage is adequate based on the potential risks they face or the value of the property or assets they are insuring. If the losses exceed the coverage limit, the insured would need to cover the excess costs out of pocket, which underscores the importance of selecting appropriate limit levels when purchasing insurance.