Limits Of Liability

Limits of liability refer to the maximum amount an insurance policy will pay out for covered claims within a specific period. It sets the cap on the insurer's financial responsibility towards a claim or series of claims.

Example #1

If a business has a general liability policy with a limit of $1 million per occurrence, the insurer will pay no more than $1 million towards a single claim. If the business faces multiple claims in a policy period, the total payouts by the insurer will not exceed the aggregate limit, which could be higher, say $2 million.

Misuse

Misuse of limits of liability can occur when a business sets its coverage limits too low to save on premiums. This could leave the business vulnerable to financial risks beyond the coverage limits. For example, if a business opts for a very low liability limit of $100,000 per occurrence and faces a lawsuit demanding $500,000 in damages, the business would be responsible for covering the remaining $400,000, potentially leading to financial strain or bankruptcy.

Benefits

Setting appropriate limits of liability ensures that businesses are adequately protected against unforeseen events that could lead to significant financial losses. For instance, a business with a proper liability limit of $1 million per occurrence is sued for $800,000 in damages. In this case, the insurer would cover the full amount, safeguarding the business's financial stability and preventing a major financial setback.

Conclusion

Understanding and properly setting limits of liability is crucial for businesses to protect themselves from potential financial ruin. It ensures that they have the necessary coverage to handle claims and lawsuits that may arise. By setting appropriate limits, businesses can operate with confidence knowing they are financially secure in case of unforeseen events.

Related Terms

CoverageClaimInsurerLiabilityPolicy Limit