What is a liability limit in an insurance policy?

A liability limit in an insurance policy refers to the maximum amount an insurer will pay for a covered loss. This ensures that both the insured and the insurer are clear about the financial boundaries of the policy. For instance, if a policy has a liability limit of $100,000, the insurer will cover claims up to that amount. If damages exceed this limit, the policyholder may be responsible for the remaining costs.

Understanding liability limits is crucial because these amounts can significantly impact the financial protection provided by the policy. They help prevent claims from exceeding available funds, ensuring that both insurers and policyholders understand their potential financial exposure in the event of a loss.

In the context of the other choices, the total amount of coverage for all incidents misrepresents what a liability limit covers, as it refers specifically to limits on individual incidents rather than cumulative coverage. The minimum amount of coverage required by law focuses more on regulatory requirements rather than on the specifics of how much a policy will pay per incident. Lastly, the amount that is deducted from a claim describes a deductible, which is different from a liability limit as it pertains to the portion of a claim the insured is responsible for before the insurer pays.