What do "coverage limits" in an auto insurance policy signify?

The concept of "coverage limits" in an auto insurance policy refers to the maximum financial amount that an insurance company will pay for a covered loss. This is crucial for policyholders to understand because it directly impacts their financial protection in the event of an accident, theft, or any other covered incident. If a loss occurs, the insurance will only compensate up to the specified limit in the policy, and any expenses beyond that will have to be covered out-of-pocket by the insured.

For example, if a policy has a liability coverage limit of $100,000 and the policyholder is responsible for damages amounting to $150,000 from an accident, the insurer will only pay $100,000, leaving the policyholder to handle the remaining $50,000. Understanding this limit helps policyholders make informed decisions about their coverage needs and potential risks.

Other options reference different aspects of insurance that do not pertain specifically to what coverage limits entail. The minimum coverage required by law refers to the mandated insurance amounts that must be carried to legally drive, while the amount of premium pertains to the cost of insurance and the number of claims that can be filed relates to claims management and policy conditions, neither of which directly defines coverage limits.