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Limit

Reviewed by Stefan Tirschler

Noun

lim·it | ˈlɪmət

Definition: The highest amount of money an insurance policy will pay in the event of a claim.

Her insurance policy carried a maximum payable limit of $5,000 for jewellery.

What is a limit?

You won’t often find insurance policies that offer unlimited coverage. Instead, insurance policies include maximum amounts that they’ll pay out for different types of claims. These are called limits, or maximum payable limits.

One insurance policy may have several different limits of coverage that apply to different types of claims.

For example, a homeowner’s insurance policy could pay a maximum of $300,000 for rebuilding the house, a maximum of $1 million for liability claims, and a maximum of $10,000 for damage to the detached garage.

Your insurance policy wordings describe each of these limits.

When you buy a new insurance policy, you may have the option to raise or lower certain limits based on how much coverage you need. For example, your insurance provider may include a $1,000,000 limit of liability coverage by default and allow you to raise that limit in exchange for a higher premium, if you wish.

Many home insurance policies place special limits on certain items of specialty property. For example, a policy may have a $100,000 limit of coverage for personal property, but a special limit of only $5,000 for jewellery. That means the maximum the insurer will pay for lost or damaged jewellery is only $5,000, regardless of how high your personal property coverage limit is.

You can raise these special sub-limits by asking your insurance provider to add an endorsement to your policy. Such endorsements also come with higher premiums.

Our approach at Square One is a little different.

We don’t have special sub-limits for speciality property. Instead, specialty property like jewellery or collectibles is excluded from policies by default (so you don’t have to pay to insure things you don’t own). Our customers can choose their own limits of coverage for each type of specialty property.

In most home insurance policies, each maximum payable limit is per occurrence. That means if you make multiple claims in the year, each claim will be eligible for the full amount of coverage. Multiple claims don’t add up when it comes to calculating the maximum payable.

How do I choose a coverage limit?

Knowing now what insurance limits are, how do you choose the right limits for you? If your limits are too low, you’re underinsured, and your policy won’t be sufficient to cover a significant loss—defeating the point of having insurance in the first place.

But, if you choose limits that are too high, you end up paying more in premiums than you need to.

Choosing the right limits of insurance isn’t as hard as it sounds, but there are different things to consider depending on which limit you’re looking at.

Dwelling / Coverage A

This amount is the most your insurer will pay to repair or replace your home itself. The limit needs to be high enough to cover the cost of rebuilding the entire structure, taking into account labour, building materials, bylaw-mandated improvements, and so forth.

Fortunately, insurance providers can estimate this amount for you based on your home’s age, construction type, location, and other factors. You may need to increase the limit beyond their estimate if your home has expensive custom features like marble countertops or hardwood floors.

Many insurance providers, including Square One, offer Guaranteed Replacement Cost. If you qualify for Guaranteed Replacement Cost coverage, your policy will pay whatever it costs to rebuild your home, even if it exceeds the policy’s limit of coverage. However, to qualify, you’ll have to insure your home for at least the insurance provider’s estimate of the rebuild value.

Detached structures / Coverage B

This coverage limit is for structures that aren’t connected to the house, like sheds, gazebos, or docks. Many insurance providers calculate this limit as a percentage of Coverage A, but that doesn’t work well for homeowners who have no detached structures at all (or several expensive detached structures).

To figure out the right limit for your detached structures coverage, estimate what it would cost to replace or rebuild all your detached structures at once.

Personal property / Coverage C

This limit is for your movable property, like furniture, appliances, or clothing. Many home insurance providers calculate this limit as a percentage of the building coverage. However, that doesn’t necessarily reflect the coverage limit you need.

To figure out how high your contents coverage limit should be, first take an inventory of your possessions. With your inventory in hand, you can estimate what it would cost to replace everything.

If your insurer imposes sub-limits for specialty items like jewellery or antiques, and you have any such items, you may need to ask them to add an endorsement to increase the sub-limit.

If you’re not sure what a piece of specialty property is worth, you may need to get it appraised before you decide how much to insure it for.

Loss of use / Coverage D

Loss of use coverage may refer to several different things, but on home insurance policies the most significant is Additional Living Expenses, or ALE. This coverage helps you pay increased living costs when you can’t live in your home temporarily following an insured loss.

To ensure that your ALE coverage is high enough, calculate how much you’d spend on hotels, meals, transportation, pet kenneling, and so on, if you couldn’t live in your home for an extended period. It can take months, or even a year-plus to rebuild a home completely. For tenants, you’d need ALE coverage for as long as you think it would take you to find a new home to rent.

If you have relatives nearby that you know you could stay with long-term, you could get away with a lower coverage limit for ALE—but be sure you have that option available.

Liability / Coverage E

Liability coverage protects you if you’re found legally liable for something and ordered to pay damages. Depending on what you’re liable for, damages can reach into the millions. Square One recommends a liability coverage limit of $1-2 million. Generally, you shouldn’t take a limit lower than $500,000, even if your insurer allows you to do so.

Liability coverage is usually inexpensive, so it’s worth getting a higher limit to ensure you’re covered for worst-case scenarios.

Depending on your insurance provider, you might not have the option to adjust all of the different coverage limits on your policy. Square One customers can customize most of their coverage limits to suit their needs.

If you’re in doubt about whether you’ve selected the right limits, get in touch with your insurance agent or broker. They’ll be able to give you advice on any of your policy limits.

The important points

  • Maximum payable limits are the highest dollar amount an insurance policy will cover for any single claim.
  • Insurance policies have different maximum limits for different coverages.
  • It’s worth taking the time to ensure your policy has limits that reflect your actual insurance needs
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