What does a "liability limit" in an insurance policy signify?

A liability limit in an insurance policy signifies the maximum amount the insurer will pay for a covered claim. This is a critical aspect of liability insurance as it establishes a cap on the insurer’s obligation in the event of a claim. For instance, if an insured individual causes an accident that results in damages or injuries to another party, the liability limit defines the highest financial amount the insurer will cover to settle that claim.

Understanding this limit is essential for policyholders, as it directly impacts their financial security in the event of a lawsuit or a claim. If the claim amount exceeds the liability limit, the insured would be responsible for paying the excess amount out of their own pocket. This is why individuals and businesses often assess their potential risks and choose liability limits that adequately protect against their specific exposure and assets.