Legal Definitions - policy limits

Policy limits refer to the maximum amount of money an insurance company will pay out for a covered loss or claim under a specific insurance policy.

Once the costs associated with a claim reach this predetermined maximum, the insurance company's financial responsibility for that particular claim or type of coverage ends. Any expenses beyond the policy limit become the responsibility of the policyholder.

• Example 1: Automobile Accident Liability

  Imagine a driver, Sarah, causes a car accident that results in significant damage to another vehicle and injuries to its occupants. Sarah's auto insurance policy has a liability limit of $100,000 for property damage and $300,000 for bodily injury per accident.

  How this illustrates policy limits: If the repairs to the other car cost $120,000, Sarah's insurance company will only pay up to its $100,000 property damage limit. Sarah would then be personally responsible for the remaining $20,000. Similarly, if the medical bills for the injured parties total $400,000, the insurance company would pay up to its $300,000 bodily injury limit, leaving Sarah to cover the additional $100,000.

• Example 2: Homeowner's Property Damage

  Consider a homeowner, Mark, whose house suffers extensive damage from a severe hailstorm. His homeowner's insurance policy has a dwelling coverage limit of $400,000, which is the maximum amount it will pay to repair or rebuild his home.

  How this illustrates policy limits: If the estimated cost to repair Mark's home is $450,000, his insurance company will pay up to the $400,000 policy limit for dwelling coverage. Mark would then need to pay the additional $50,000 out of pocket to complete the repairs, as the insurance company's obligation ends at its stated limit.

• Example 3: Professional Malpractice Insurance

  A dentist, Dr. Lee, is sued by a patient alleging negligence during a procedure. Dr. Lee carries professional liability (malpractice) insurance with a "per claim" limit of $1,000,000 and an "aggregate" limit of $3,000,000 (meaning the total amount the insurer will pay for all claims in a policy period).

  How this illustrates policy limits: If the patient wins the lawsuit and is awarded $1,500,000 in damages, Dr. Lee's insurance company will pay up to the $1,000,000 "per claim" policy limit. Dr. Lee would be personally responsible for the remaining $500,000. The aggregate limit would then track how much has been paid out over the policy year across all claims, ensuring the total payouts do not exceed $3,000,000.