What is meant by the term 'policy limit'?

The term 'policy limit' refers to the maximum amount that an insurance policy will pay for a covered loss. This is a critical aspect of an insurance contract, as it defines the insurer's financial liability in the event of a claim. Understanding the policy limit is essential for policyholders, as it indicates the extent of coverage they have and helps them manage risks effectively.

When a loss occurs, the insurer will only pay up to the specified limit for that particular type of coverage. For instance, if a policy has a limit of £100,000 for property damage and the insured suffers a loss amounting to £120,000, the insurer would be liable only for the £100,000 limit. This distinction is vital for policyholders to know so they can ensure they have adequate coverage for their needs, particularly in high-risk situations.

In contrast, the other choices focus on different aspects of insurance that do not define 'policy limit.' The cost of the policy premium relates to the payment made for the insurance coverage, while minimum coverage required by law pertains to statutory requirements that ensure certain basic levels of protection. The deductible amount is what the insured must pay out of pocket before the insurance kicks in for a claim, which also does not relate to the overall