What do coverage limits in an insurance policy define?

Coverage limits in an insurance policy specifically define the maximum payout that the insurer will provide for a particular claim or event. This means that if a loss occurs, the insurance company will only pay up to the established limit for that specific type of claim. For instance, if a policy has a coverage limit of $100,000 for property damage, and a loss occurs that is valued at $150,000, the policyholder would only receive $100,000 from the insurer, as that is the maximum limit established in the policy.

Understanding coverage limits is crucial, as they determine how much financial protection the insured can expect in the event of a loss, and help ensure that policyholders choose limits that adequately reflect their needs and the risks they face.