What are Limits of Liability?

Limits of Liability refer to the maximum amount of money that an insurance company agrees to pay in the event of a claim. These limits are clearly outlined in the insurance policy. They can be per occurrence (the maximum payout for a single incident) or aggregate (the maximum payout for all claims during a policy period).

For example, suppose an individual has an auto insurance policy with a limit of liability of $50,000 for property damage. In that case, the insurance company will not pay more than $50,000 for damages caused to another person’s property in a single accident.

There are also sub-limits within policies that dictate the maximum amount that can be paid out for specific types of losses. For instance, a homeowner’s insurance policy might have liability limits of $500,000 but a sub-limit of $1,000 for jewelry theft.

The policyholder can usually choose their liability limits when they purchase the policy, but higher limits typically come with higher premiums. Policyholders need to choose limits that are high enough to protect them financially in case of a significant claim.

In some cases, if the cost of a claim exceeds the limit of liability, the policyholder will be responsible for paying the difference out of pocket. This is why it’s crucial to understand liability limits when purchasing an insurance policy.