What Is an Insurance Coverage Cap?

by CorrinHowe

Overview

An insurance policy is a contract.

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Insurance companies write caps, or the limit, of money they will pay for a covered loss. Companies use this as a tool to balance the amount of money they collect in premiums against how much they pay out in claims.
Function

For-profit companies limit coverage to lower large payouts and increase profits. Mutual or reciprocal insurance, which are not for profit, write coverage limits to remain financially solvent.

Types

One way to cap coverage is to state a maximum amount paid for a loss. Co-insurance, or splitting the cost of a loss between both parties, is a cap. Policyholders reduce their premium by paying a deductible, which also limits the insurance company's payment.
Policy

Automobile, health, life and homeowner policies all have forms of coverage limits. The Federal Deposit Insurance Corporation (FDIC) limits how much money it will insure an individual bank account.
Limits

Insurance policies define the coverage caps within the contract language. These limits take the form of the maximum payment per occurrence, per person or per policy period.
Considerations

Policyholders should know and understand the coverage caps, which can expose them to personal responsibility for third-party injury or damage after automobile and homeowner's insurance pay the coverage limit. In the event of unexpected health issues or death, these policies might not cover all the insured's incurred expenses.