Limit

A limit represents the maximum benefit an insurer will pay a policyholder in the event of a specified loss. In other words, regardless of the magnitude of the loss, the insurance company will not reimburse the insured for more than the predetermined amount. With regard to homeowner's insurance, coverage limits can apply to personal property, the overall replacement value of the home, liability coverage, and more. Typically, the insurer and homeowner set these figures together when the house insurance policy is created.

Homeowner's insurance coverage limits come in a variety of forms. We've outlined the those most commonly associated with house insurance policies below.

• Personal property (total). Your policy will cap how much your insurer will reimburse you for total losses to your personal possessions. For instance, if your policy has a personal property limit of $75,000, you will not receive benefits in excess of this amount even if the lost items were worth more than the cap.
• Personal property (per item). Most homeowners do not realize that their house insurance policies cap per-item coverage to $1,000. In some cases, the cap may be $1,000 for several items combined. For example, some policies cap the coverage for watches and other jewelry to $1,000 total.
• Property coverage. This is the amount for which you have insured your home. In other words, if you insured your home for its real estate value of $200,000 but it cost you $300,000 to rebuild after a loss, your insurer would only reimburse you for the $200,000 for which you originally insured it.
• Liability. If someone filed a lawsuit or a claim against you for bodily injury or property damage you caused, your insurer would pay the claim or suit up to your liability coverage amount. Most home insurance liability limits start at $300,000.

How These Are Set

The limits are mutually agreed upon by the insurer and the homeowner when the policy is purchased. Insurers offer a variety of options from which policyholders can choose. The purpose of these is to contain the insurer's risk in underwriting the policy. Of course, if policyholders chose larger coverage limits, they will also have to pay larger premiums. This is because in the event of a loss, the insurer will be financially responsible for a greater portion of the costs if the homeowner has selected high coverage limits. To compensate for this added risk, insurers charge more expensive premiums.