What is 'First-Loss Policy'

A first-loss policy is 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 or property. In return, the insurer agrees to not penalize the policyholder for under-insuring their goods or property.

BREAKING DOWN 'First-Loss Policy'

First-loss policies are most commonly used as 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.

First-loss insurance is also considered first when filing any claims if someone carries more than one policy for a given threat to their property. The coverage provided can actually be more comprehensive, which can be important for costly assets that might otherwise be difficult or impossible to insure. 

Consider this example of a typical situation in which this type of insurance might be in effect. If a store owner held $2.5 million worth of goods in their store but figured that the most they could lose at any one time due to theft or burglary would be approximately $50,000, they 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, they would only be compensated for $50,000 of the loss, as stated under the first-loss policy.

Other types of insurance, such as water damage coverage or insurance against theft-related losses at home, can also be insured on a first-loss basis. A first-loss policy may have lower premiums than a policy that covers your property’s full value.

It’s worth noting that first-loss policies may come with a deductible. In that case, the insurance would cover the difference between your deductible and the maximum benefit you chose.

Benefits of First-Loss Policy Insurance

  • A first-loss insurance policyholder should benefit from paying a lower premium for partial protection against property losses.
  • A first-loss policy would be beneficial for small business owners, who don't carry a large inventory, in which the total value of goods is moderate. In this sort of situation, first-loss insurance should be an affordable and effective way to purchase protection.
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