Idaho Property and Casualty Practice Exam 2025 - Free Practice Questions and Study Guide

The term "exhaustion of limits" in liability insurance refers to the situation where the coverage limits of a policy have been fully utilized through claims. In practical terms, this means that the insurer has reached the maximum dollar amount that they are obligated to pay under the terms of the policy for covered claims. Once the limits are exhausted, the policyholder no longer has coverage for additional claims within that policy year, and any subsequent claims may need to be paid out of pocket or could potentially be covered by a different policy if available.

This concept is significant for insured individuals and businesses, as it highlights the importance of understanding their coverage limits and the potential financial risks associated with high-frequency or high-claim incidents. Knowing when the limits have been exhausted can help policyholders make informed decisions about their coverage needs and assess whether additional insurance or higher limits are necessary to protect their interests effectively.