What is meant by the term 'limit of liability' in an insurance policy?

The term 'limit of liability' refers to the maximum amount an insurer will pay for a covered loss under a specific insurance policy. This limit is established in the policy contract and defines the extent of the insurer's financial obligation in the event of a claim. Understanding this concept is crucial for policyholders, as it determines how much they can expect to receive for damages or losses incurred, ensuring clarity around the potential compensation in various situations.

For instance, if a policy has a limit of liability set at $100,000, the insurer will only cover losses up to that amount, regardless of the total damages incurred. Policyholders need to be aware of this limit when selecting coverage amounts to ensure that they are adequately protected against significant losses.