Policy Limit
The maximum dollar amount an insurer will pay for a covered loss under a policy.
What is Policy Limit?
A policy limit is the maximum amount of money an insurance company will pay for a covered claim under a given policy. Limits can be structured as per-occurrence limits (the maximum paid for any single event), aggregate limits (the maximum paid across all claims during the policy period), or per-person limits (used in auto liability to cap payment for any one injured party). Once a policy limit is exhausted, the policyholder is personally responsible for any remaining costs. Choosing appropriate limits is critical — limits that are too low leave a coverage gap, while excessively high limits increase premiums unnecessarily. Umbrella and excess liability policies can extend coverage beyond primary policy limits.
Example
A homeowner carries a $300,000 personal liability limit on their homeowners policy. A guest trips on their property, sues, and a court awards $420,000 in damages. The insurer pays $300,000 — its policy limit — and the homeowner is personally liable for the remaining $120,000. Had the homeowner carried a $1 million personal umbrella policy, it would have covered the excess amount.
Source: National Association of Insurance Commissioners — Understanding Your Policy