Washington State Insurance Practice Exam

What are "coverage limits" in an insurance policy?

1. The minimum premium required for coverage

2. The maximum amount paid for a covered loss

3. The detailed descriptions of insured property

4. The deductible amount subtracted from claims

The correct answer is: The maximum amount paid for a covered loss

Coverage limits in an insurance policy refer specifically to the maximum amount that an insurer will pay for a covered loss. This means that if a policyholder experiences a loss that is eligible for payment under their policy, the insurer will not pay more than the amount specified in the coverage limits. For instance, if a homeowner's policy has coverage limits of $250,000 for the structure of the home, and the home sustains damage that costs $300,000 to repair, the insurer will only pay up to the limit of $250,000, leaving the homeowner responsible for the remaining amount. Understanding coverage limits is crucial for policyholders, as it helps them assess whether they have sufficient coverage to protect against potential losses. If coverage limits are set too low, the insured may face significant out-of-pocket expenses in the event of a claim. On the other hand, setting higher coverage limits may increase premium costs, but it provides greater protection against potential losses. The other options describe different aspects of insurance policies rather than coverage limits. For instance, the minimum premium relates to the cost of obtaining coverage, while detailed descriptions of insured property pertain to the specifics included in the policy declaration. A deductible is the portion of a claim that the policyholder must pay before