Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What is the significance of a policy's limits of liability in an insurance contract?

1. They define the premium amount

2. They restrict the extent of coverage

3. They determine underwriting criteria

4. They are negotiable based on client relationships

The correct answer is: They restrict the extent of coverage

The correct answer is that the limits of liability in an insurance contract serve to restrict the extent of coverage. This is crucial because it clearly defines the maximum amount that the insurer will pay for a covered loss. By having established limits, both the insurer and the insured understand the financial boundaries of the policy, which helps manage expectations during claims processing. The limits of liability can influence various aspects of the insurance agreement, ensuring that the policyholder knows how much protection they will receive in the event of a claim. This clarity helps in the risk assessment and financial planning for both parties involved. Although these limits can indirectly influence other factors such as premium amounts or underwriting criteria, their primary purpose is to delineate the boundaries of coverage, ensuring that the insured knows the financial limits of their policy.