Policy limits refer to the maximum amount that an insurance company is obligated to pay for a particular claim or loss, as specified in the policy contract. This limit represents the highest level of coverage provided by the insurer and serves as a ceiling on their financial exposure. In other words, once the payout reaches this threshold, the insurance company is no longer responsible for any additional costs associated with the incident. The purpose of having policy limits is to provide protection against catastrophic losses while allowing for some level of coverage within an affordable price range.