What does "automatic restoration of limits" mean in an insurance policy?

"Automatic restoration of limits" refers to a specific provision within an insurance policy that ensures the policy limits are reinstated to their original amounts after a covered loss has been paid. This is crucial for policyholders because, without this provision, the limits available for future claims would be reduced by the amount paid out for past claims, potentially leaving the insured underinsured in case of subsequent losses.

For example, if an individual has a policy with a limit of $100,000 and makes a claim for $30,000, without automatic restoration, their new limit would be $70,000. However, with the automatic restoration provision, after the claim is settled, the limit returns back to $100,000, ensuring ongoing protection without extended financial gaps.

Understanding this concept is essential for policyholders as it impacts their future coverage needs and financial security following claims. The other options relate to different aspects of insurance policy structures but do not encapsulate the idea of reinstating coverage limits following a loss, which is the core of the automatic restoration provision.