What does the term "coverage limit" refer to?

The term "coverage limit" specifically refers to the maximum amount an insurer will pay for a covered loss under a policy. This is crucial in understanding how insurance policies function because it establishes the boundary within which the insurer will provide financial assistance when a claim is made. For instance, if a policy has a coverage limit of $100,000 and the insured incurs a covered loss of $150,000, the insurer will only pay up to the limit of $100,000, leaving the insured responsible for the remaining costs.

Understanding coverage limits helps policyholders assess their risk and determine whether they need to purchase additional coverage or adjust their policies to match their needs better. This concept extends across various types of insurance, including auto, home, and commercial insurance, making it a fundamental aspect of insurance contracts and a critical factor in deciding on an appropriate amount of coverage.