What Is the Limit of Liability? Understanding Protection Plan Coverage

Quick Summary: Understanding the Limit of Liability in Protection Plans

The limit of liability is the maximum amount a protection plan or warranty will pay for repairs or replacements. The limit of liability usually equals the purchase price of the product covered, not including sales tax.

There are two main types of limit of liability: eroding and non-eroding.

• Eroding: coverage continues until the sum of covered claims reaches the limit of liability. Once the limit is reached, typically the plan ends.
  
  
• Non-eroding: the coverage amount restarts after each approved claim. These plans may cost more, but offer greater protection and peace of mind.
  

Keep reading below for more details about limits of liability, how they work, and answers to commonly asked questions about them.

Full Breakdown: How Limits of Liability work

Imagine this - you drop your brand new laptop and the screen shatters. Thankfully, you purchased a protection plan so the repair is covered.

A few months later, the keyboard stops working. You're able to get the repair covered again. But then, your hard drive fails and your protection plan provider notifies you that they can only pay a portion of the cost to repair the hard drive.

What happened?

You may have reached something called the limit of liability, which is a crucial part of most protection plans that determines how much the provider will pay for repairs or replacements.

Let's break this process down in simple terms so it's easy to understand how the limit of liability works when it comes to product protection plans. 

What is a Limit of Liability?

A limit of liability is the maximum amount your protection plan provider will pay towards the repairs or replacement of your product during the extent of the plan.

Typically there are two types of limits of liability, eroding and non-eroding. To start, we'll focus on an eroding limit of liability.

Think of an eroding limit of liability as a gift card that can only be used for product repairs. If your plan's limit of liability is $2,000 - the cost of your product, your provider will pay up to $2,000 in total on repairs. Once the $2,000 has been used in full, your coverage ends, even if the coverage term (years of coverage) was supposed to last longer.

Imagine a progress bar slowly filling with each repair cost - once it's full, the protection plan is maxed out. 

How it Works in Real Life

Let's walk through a real life scenario:

You buy a television for $1,000 and you add a protection plan during checkout. Then life happens and you need some repairs:

• First claim: Distorted Picture & Sound - repair cost: $300
  • Remaining coverage: $800
• Second claim: HDMI Port Failure - repair cost: $200
  • Remaining coverage: $500
• Third claim: Electrical Issue in the Circuit Board - repair cost: $300
  • Remaining coverage: $200

In this case, the total value of approved claims adds up to $800. You have not yet reached the $1,000 limit of liability, so your protection plan can still cover potential future issues with the television up to $200.

What Happens When You Reach Your Limit of Liability?

Once the limit of liability has been reached:

• You are no longer eligible for repairs or replacements under that specific protection plan. 
  
• You will not have active coverage on your product anymore.
• In some cases—depending on the provider—you may have the option to extend or renew your existing coverage, and in other cases you might be allowed to purchase a new plan on the same device after your current plan expires.
  

Eroding vs. Non-Eroding Limits of Liability: What's the Difference?

So far, we’ve talked about protection plans where the limit of liability erodes and decreases with each approved claim. This is the most common type of plan.

But not all protection plans work this way.

Some higher-tier or premium plans offer a Non-Eroding Limit of Liability, which gives you more flexibility and peace of mind.

Here’s how It Differs:

Non-Eroding Limit of Liability

• The coverage resets after each claim and you receive the full benefit amount again.

• You can make multiple claims, and each is treated like a fresh start.

• These plans typically cost more but offer a deeper layer of protection.
  

Why Does the Limit of Liability Exist?

The limit of liability helps keep protection plans fair, affordable, and easy to manage for both the provider and the customer.

Here's why:

• It keeps plan costs reasonable
  • If plans offered unlimited repairs or replacements, they would have to be priced significantly higher and that would make them less accessible to most consumers. The limit of liability ensures that a standard protection plan remains cost effective. 
• It sets clear boundaries for coverage
  • This avoids confusion over time when a consumer has filed multiple claims over time or the repair costs start approaching the original value of the product. Without this limit, some customers might expect unlimited repairs which is not sustainable in the long run, unless a premium, non-eroding plan is purchased.
• It prevents over-repairing
  • Eventually, repairing a heavily damaged or defective product becomes less practical and more expensive than replacing the product all together. This helps consumers avoid spending more money on repairs than what the product is worth to begin with.

How to Find Your Plan's Limit of Liability

Not sure what your protection plan covers? You can usually find this information in your protection plan's terms and conditions:

• Look in sections labeled "Coverage Details" or "Limitations"
• Look for wording such as:
  • "The maximum liability..."
  • "Coverage is limited to the cost of the repair or replacement, up to the item's retail price."
  • "We will pay no more than the purchase price..."
  • "Maximum benefit amount"
  • "Claims are subject to a cumulative limit equal to the product's original purchase price."
  • "Plan coverage limit"
  • "This plan will expire upon reaching the maximum liability limit."
  • "Maximum payout"

If you're having trouble locating this information, contact the protection plan provider for clarification. They should be able to tell you exactly what your coverage limit is. 

Common Misunderstandings

Having a strong understanding of your protection plan's limit of liability helps you use your coverage to its full potential while avoiding unnecessary surprises. It sets a clear boundary for how much the provider will pay for potential repairs and replacements. Once that amount is reached, the plan has successfully fulfilled its purpose.

If you're unsure about the details of your protection plan or need help in understanding your specific coverage, don't hesitate to reach out with questions. Our team is always happy to assist.