What Is Ultimate Net Loss?

Ultimate net loss is a party's total financial obligation when an insured event occurs. The insured's ultimate net loss from costs such as property damage, medical expenses and legal fees will be offset by the portion of the loss that is paid by the insurance company (usually the amount of the claim that exceeds the insured's deductible, up to the policy maximum). Thus, the insured's loss will often be limited to the policy deductible unless the total loss exceeds the policy maximum.

Understanding Ultimate Net Loss

An insurance company's ultimate net loss from a claim may be offset by the salvage value of any recoverable items, awards from successful claims against third parties, money from reinsurance and the policyholder's deductible and policy maximum. Ultimate net loss can be a generic term that refers to the total amount of any loss, but in finance, it is most commonly used to refer to an insurance company's total loss from a policyholder's claim.

Insurance companies can protect themselves against large ultimate net losses by sharing policy risk with reinsurers. When an insurer shares a portion of the premiums it collects with a reinsurance company, it gains protection against a portion of its claims losses. For example, an insurance company might receive $30,000 in annual premiums for a $10 million policy. To protect itself against the threat of a $10 million loss, the insurance company might cede $15,000 of the annual premium to a reinsurer, who would agree to cover $5 million of the potential loss.

Ultimate Net Loss and Liability Insurance

In liability insurance, ultimate net loss is the amount actually paid or payable for the settlement of a claim for which the reinsured is liable (including or excluding defense costs), after deductions are made for recoveries and certain specified reinsurance.

In liability insurance contract language, ultimate net loss is often described as "the total sum which the insured, or his underlying insurers as scheduled, or both, become obligated to pay by reason of personal injuries … and shall also include … expenses for doctors, lawyers, nurses and investigators and other persons, and for litigation, settlement, adjustment and investigation of claims and suits which are paid as consequence of any occurrence cover hereunder." 

Ultimate Net Loss and Reinsurance

In reinsurance, ultimate net loss refers to the unit of loss to which the reinsurance applies, as determined by the reinsurance agreement. In other words, the gross loss less any recoveries from other reinsurance which reduce the loss to the treaty in question.