What do limits of liability indicate in an insurance policy?

Limits of liability in an insurance policy refer to the maximum amount that an insurer will pay for covered losses. This indicates the upper threshold or cap on the coverage provided within that policy. Understanding these limits is crucial for both insurers and policyholders, as it delineates the extent of financial protection available for various types of claims. For example, if a policy has a limit of liability of $500,000, the insurer will only pay up to that amount, regardless of the total damages incurred. Therefore, anyone purchasing or reviewing an insurance policy should be aware of these limits to ensure they have adequate coverage for potential risks.

The other options, while related to policy features, do not capture the fundamental nature of limits of liability. They pertain to aspects like deductibles and obligations, which define other elements of a policy rather than its coverage ceiling.