What is meant by liability limit in insurance terms?

Liability limit refers to the maximum amount that an insurance company will pay for a covered claim under a liability insurance policy. This limit is crucial because it establishes the insurer's financial obligation in the event of a loss arising from liability, such as bodily injury or property damage caused to others.

For instance, if a business has a liability limit of $1 million and faces a claim for $1.5 million due to an incident, the insurance company will only pay up to the established limit of $1 million, leaving the business responsible for the remaining balance. Understanding the liability limit helps policyholders assess their risk exposure and determine if they need to purchase additional coverage or a higher limit to adequately protect against potential claims.

The other options represent different aspects of insurance. The total amount of the premium paid pertains to the cost of obtaining the insurance coverage, while the deductible is the portion of a claim that the policyholder must pay out-of-pocket before insurance kicks in. The duration of coverage simply refers to the period during which the policy is active and does not relate to the financial limits on claims.