What if I don’t buy enough insurance to cover my entire claim?
An insurance policy will always state its limits, which are the maximum amounts it will pay in the event of a claim. On a homeowners policy, there are two main types of limits: first party limits, where the insurance company reimburses you for your loss, and third party limits, where the insurance company pays others for your liability. In either situation, the maximum amount the insurance company can pay is the limit stated on the declarations page of the policy.
In a first party situation, if you did not insure your house in an amount sufficient to repair or rebuild it, you will be uninsured for the balance and will need to fund the difference yourself. In a third party liability claim, the insurance company will do its best to settle the claim on your behalf within the limits of liability on your policy. However, if it is a serious claim, it is possible that you will be personally exposed to damages if the judgment exceeds your insurance policy’s limits.
For this reason, you should always carefully evaluate the amount of insurance you need when selecting how much insurance to purchase. It should be fairly straightforward to estimate the cost of replacing your house and personal property. Your liability exposure is somewhat more difficult to evaluate, as you cannot always predict what kind of claim may be filed against you. However, increasing liability limits is usually a very small cost and the extra premium may pay for your peace of mind.