Texas Property and Casualty License Practice Exam

What does the term "Limit of Liability" refer to in insurance policies?

1. The minimum amount payable for each claim

2. The max amount of coverage agreed to be paid per loss

3. The total amount payable for all claims in a policy

4. The minimum deductible required for coverage

The correct answer is: The max amount of coverage agreed to be paid per loss

The term "Limit of Liability" specifically refers to the maximum amount of coverage that an insurance policy will pay for a covered loss. This is a critical component of any insurance agreement, as it defines the ceiling on financial protection offered to the insured individual or entity in the event of a claim. When a policyholder experiences a loss, whether it be due to property damage, liability claims, or other covered events, the limit of liability determines how much the insurer is obligated to pay. This limit can vary from one policy to another, depending on the terms and conditions agreed upon at the inception of the insurance contract. Understanding the limit of liability is essential for policyholders, as it helps them assess whether their coverage is adequate to protect against potential risks, ensuring they are not left with unexpected financial burdens in the event of a substantial loss.