What Is Limit Of Liability Insurance? A Detailed Explanation

Limit of liability insurance refers to maximum amount that an insurance company pays for a specified loss, such as damage to your home or accusations that you caused someone else harm

Liability limits vary based on policy terms and coverage type, such as a car insurance policy with limits like 100/300/100—$100,000 for one person’s bodily injury, $300,000 for multiple injuries, and $100,000 for property damage per accident.

Any amount beyond these limits is the policyholder’s responsibility to cover personally.

What is limit of liability insurance
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What is a limit of liability?

Homeowners insurance encompasses six main coverages such as; dwelling, other structures, personal belongings, loss of use, personal liability, medical payments.

The policy specifies the events or perils that activate each coverage and the corresponding payout for each type of claim. It’s essential to note that the insurer’s responsibility is limited to a specific monetary value known as the limit of liability, and they may not cover the entire loss.

The limit of liability varies for each primary coverage. For instance, the dwelling coverage limit is determined by the insurance company based on the estimated cost to rebuild the home, considering factors like location and building costs.

On the other hand, the limit of liability for other structures’ coverage is typically a percentage of the dwelling coverage, often around 10 percent.

What does a limit of liability mean for a homeowner?

Understand homeowners policy limits before buying. These limits indicate if you have enough insurance.

When you reach your policy’s limits, the insurance company won’t pay more. You’re left covering the rest.

Ensure enough dwelling coverage for a complete home rebuild. Check limits for other structures, personal property, and loss of use.

These are percentages of dwelling coverage, so decide if you’re comfortable with each. Review personal property limits to cover most belongings.

Choose a personal liability coverage limit. We recommend around $100,000, but adjust for a higher net worth or owning an attractive nuisance.

Where can I find the limits of liability?

The declarations page of your insurance policy lists the six coverages with your insurer’s limits of liability next to them.

For example, you may see your personal liability coverage with $100,000 listed next to it.

This means your insurance company’s limit of liability is $100,000, and it will pay claims up to that amount as long as the details fit what’s outlined in your policy.

Your insurer typically pays for your defense and covers court awards if you’re sued, but only up to its limit of liability.

Additionally, your policy may have special limits of liability for certain items, such as:

  • Jewelry.
  • Firearms.
  • Money.
  • Electronics.

For high-value items like these, your policy may only cover a specified amount, sometimes only $1,500.

That may not be enough for expensive items, so you may need a scheduled personal property endorsement or an additional insurance policy.

Read more: What is cyber insurance? Everything you need to know

Can I increase the limits of liability on my home insurance?

Consider adjusting certain limits in your insurance policy. While increasing the dwelling limit is an option, many insurers advise against it.

They use a specific formula for liability limits, ensuring proper underwriting aligns with the correct premium.

However, there are scenarios where raising home insurance limits is practical. For example, if you have a full guest house, default limits on other structures coverage may fall short.

The same applies to the personal liability limit, which people often raise as income and assets increase, minimizing the risk of lawsuits.

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