How is “policy limits” defined in an insurance contract?

In an insurance contract, “policy limits” specifically refer to the maximum amount an insurer is obligated to pay for a covered loss under that policy. This limit is critical as it establishes the financial boundary of the insurer's liability for claims. For example, if a policy has a limit of $100,000, and the insured experience a loss that is evaluated at $150,000, the insured would only receive up to the stated limit of $100,000 for the claim, regardless of the total loss incurred. Understanding policy limits helps policyholders manage their expectations and ensures that they are adequately covered for potential risks. It is an essential element in both risk management and financial planning within insurance contexts. The other options do not accurately capture the essence of what policy limits mean in insurance contracts.