Definition of 'First-Loss Policy'
A type of property insurance policy that provides only partial insurance. In the event of a claim, the policyholder agrees to accept an amount less than the full value of damaged, destroyed or stolen items/property. In return, the insurer agrees to not penalize the policyholder for under-insuring their goods or property.
First-loss policies are most commonly used in the case of theft or burglary insurance to insure against events where a total loss is extremely rare (i.e. the burglary of all goods contained in a large store). In a first-loss policy claim event, the policyholder does not seek compensation for losses below the first-loss level. Premiums are calculated proportionately - meaning they are not based on the full value of total goods or property.
Investopedia explains 'First-Loss Policy'
Let's consider an example of what a first-loss policy would cover. If a store owner held $2.5 million worth of goods in his/her store but only assumed that the most s/he could lose at any one time due to theft or burglary would be approximately $50,000, s/he might obtain a first-loss policy for that amount. In the event that the store was burglarized and the owner lost more than $125,000 worth of stock s/he would only be compensated for the $50,000 worth of loss as stated under the first-loss policy.