Legal Definitions - liability limit

A liability limit refers to the maximum amount of money an insurance company will pay out for a covered claim under a specific insurance policy. It represents the upper ceiling of financial protection provided by the insurer for a particular type of loss or event. If the total cost of damages or losses exceeds this predetermined limit, the policyholder is personally responsible for paying the difference.

Here are some examples to illustrate how liability limits work:

• Auto Insurance: Imagine a driver has an auto insurance policy with a property damage liability limit of $50,000 per accident. If this driver causes an accident that results in $75,000 worth of damage to another person's vehicle and property, their insurance company will pay a maximum of $50,000. The driver would then be personally responsible for the remaining $25,000 in damages, as it exceeded their policy's liability limit.

• Homeowner's Insurance: A homeowner has a personal liability limit of $300,000 on their homeowner's insurance policy. A visitor slips on a wet floor in their home, sustains a serious injury, and sues the homeowner. If a court awards the visitor $400,000 in medical expenses and pain and suffering, the homeowner's insurance will cover up to $300,000. The homeowner would be obligated to pay the additional $100,000 out of their own funds because the judgment surpassed the policy's liability limit.

• Business Professional Liability Insurance: A small architectural firm carries professional liability insurance with a limit of $1,000,000 per claim. A client sues the firm for negligence, alleging that a design error led to significant construction delays and cost overruns totaling $1,200,000. The firm's insurance policy would cover up to $1,000,000 of the client's claim. The architectural firm would then be responsible for the remaining $200,000, as that amount exceeded their policy's liability limit.