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I agree with your understanding of what width:100% implies
max-width:100%; implies that the image will never exceed, i.e. spill over, the screen width. Say you have a screen with vertical resolution 300px, then defining max-width will ensure that the image is scaled down when necessary.
Despite my reservations about denoting image height in percentages, I think Turtle91's max-height:100% sounds like a good idea. Some reader systems interpret height percentages relative to the length of the document rather than the screen size, but using max-height like this wouldn't make the situation worse even in such cases.
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