What does the limit of liability indicate in a liability insurance policy?

The limit of liability in a liability insurance policy represents the maximum amount that the insurance company will pay for a covered claim. This figure is crucial because it sets the boundaries of financial protection the policyholder has against potential liability claims. If damages exceed this limit, the insured would be responsible for paying the remainder out of pocket, thereby highlighting the importance of selecting an appropriate limit based on potential risks.

Other aspects of a liability insurance policy, such as the cost of the annual premium, may influence purchasing decisions but do not define the coverage itself. Similarly, deductibles refer to the amounts that the insured must pay before the insurance coverage kicks in, and coverage exclusions identify scenarios not covered under the policy. Although all these components contribute to a comprehensive understanding of an insurance policy, they do not directly address the maximum extent of financial protection provided, which is captured by the limit of liability.