If you have some form of insurance, chances are you’ll see the words “limit” and “sub-limit” in the policy or Product Disclosure Statement (PDS).

Policy limits and sub-limits are an important consideration when anyone purchases any type of insurance policy. It’s important policyholders understand their limits and sub-limits and purchase coverage that suits their needs.

Ultimately, when it comes to insurance, numbers matter. In fact, if the numbers don’t add up, policyholders can end up frustrated and out-of-pocket. If you have any questions, read on… or talk to your insurance provider.

What is a limit?

A limit is one of the most important concepts to understand when you're considering an insurance policy. It determines the maximum amount of money an insurance company will pay for a covered claim.

Why does a limit matter?

A limit determines how much protection you have in the event of a covered loss. If the losses you experience exceed your policy’s limits, you will be responsible for paying the difference out of your own pocket.

Does a policy have just one limit?

A typical insurance policy has many different features, and each has its own limit. For example, in a landlords insurance policy there may be cover for accidental and intentional tenant damage, with a limit of $70,000. This means the most the insurance company will pay out for accidental and intentional tenant damage is $70,000. Meanwhile, there may be cover for fire damage to the building, with a limit up to the sum insured (which the policyholder nominates at time of application based on the property’s replacement value). There’s also often cover for loss of rent due to rent default, which has a different limit, usually several weeks. And cover for legal expenses, which has a different limit. The list goes on…

How are limits determined?

Each policy is different. Sometimes, the insurer sets a limit, based on many factors, statistics and probabilities. In other circumstances, the policyholder nominates a limit (known as the sum insured). When it comes to landlord insurance, the sum insured covers the cost to fully replace a property and/or contents if something happens.

What is a sub-limit?

This is where it gets a little tricky. A sub-limit is an additional limitation on cover. It is a ceiling of how much you can claim on very specific losses. In terms of property insurance, one of the most common types of sub-limit applies to contents cover and insurers often apply policy sub-limits to certain risks such as jewellery and watches, any item containing a precious metal or gemstone, antiques, manuscripts and curios, collections of stamps, coins, medals and so on.

In these instances, the insurer caps the amount that can be claimed for any one item or collection. Say, for example, a home and contents policy includes $100,000 of contents cover but the sub-limit for jewellery is $2,500. If there’s a burglary, and even if $15,000 worth of jewellery is stolen, the policyholder is only able to claim $2,500 in total for the stolen jewellery due to the sub-limit (a short-fall of $12,500 plus the excess payable).

How to avoid being caught out…

Policyholders must understand the limits and sub-limits and how they apply to their circumstances. If you have any items that would cost more than the limit or sub-limit to replace, you should nominate them to ensure that they are covered for more than the limit or sub-limit.

Limits and sub-limits can have a major impact on what you will be paid in the event of a claim for an insured event and on how you shape your policy. Be sure to read the paperwork and check that the limitations of the policy, and especially any sub-limits, are adequate to your needs. Talk to your insurer if you need to specify items or have any questions about coverage.

While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article.

This information was supplied by EBM insurance who can assist with further advice. Contact 1800 661 662 if you have any questions.