What is the significance of the "limits of liability" in a policy?

The significance of the "limits of liability" in an insurance policy lies in the fact that they define the maximum amount an insurer is obligated to pay for a covered claim. This limit is crucial for policyholders because it establishes the financial boundaries of their protection under the insurance contract. For instance, if a homeowner has a liability insurance policy with a limit of $500,000 and faces a covered claim resulting in a judgment of $600,000, the insurance company will only pay up to the policy's limit, leaving the remaining amount to be covered by the policyholder. Understanding these limits helps both insurers and insureds to know the extent of coverage and the potential financial risks involved.