What is the purpose of coverage limits in an insurance policy?

Coverage limits in an insurance policy are crucial because they define the maximum amount that an insurer will pay for a claim. This is an important feature of insurance contracts, as it provides both the policyholder and the insurer with a clear understanding of financial responsibilities in the event of a loss.

For the policyholder, knowing the coverage limit helps them assess whether the level of protection meets their needs. In the case of damages or losses, if the costs exceed the coverage limit, the policyholder will be responsible for paying the difference. This can prevent unexpected financial burdens.

From the insurer's perspective, establishing coverage limits helps to manage risk and liability. It allows the insurance company to allocate resources more effectively and set premiums that match the level of risk they are willing to accept.

In summary, the purpose of coverage limits is to set a cap on the amount payable by the insurer for a covered claim, ensuring that both parties have a clear understanding of the financial implications in the event of a loss.