What does the term 'policy limit' refer to in insurance?

The term 'policy limit' specifically refers to the maximum amount that an insurer will pay for a covered loss under an insurance policy. This limit is a crucial aspect of the insurance contract, as it defines the maximum liability of the insurer in the event that a claim is made. For instance, if a homeowner has a policy limit of $300,000 and experiences a covered loss resulting in damages estimated at $350,000, the insurer would only cover up to the policy limit of $300,000, leaving the policyholder responsible for the remaining amount.

Understanding policy limits is essential for both clients and insurance brokers, as it helps clients assess their coverage needs and ensures they are sufficiently protected in the event of a claim. It also assists brokers in providing tailored insurance solutions that align with the client's risk exposures and financial considerations.