First-Loss Policy

What Is a First-Loss Policy, and How Does It Work?

A first-loss policy is a type of property insurance that only covers a portion of the loss. In the event of a claim, the policyholder agrees to accept a settlement that is less than the full worth of the property that has been damaged, destroyed, or stolen. In exchange, the insurer commits not to penalize the policyholder for under-insuring their goods or property, such as by not increasing renewal premium rates.

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TAKEAWAYS IMPORTANT

• A first-loss policy is a type of property insurance that only covers a portion of the loss.
• The policyholder does not seek compensation for losses below the pre-determined first-loss amount in the case of harm.
• Paying a reduced premium for partial protection against property losses should benefit a first-loss insurance policyholder.

The First-Loss Policy: What It Is and What It Isn't

Theft or burglary insurance is the most prevalent usage of first-loss policies to protect against occurrences where a total loss is extremely unlikely (i.e., the burglary of all goods contained in a large store). The policyholder does not seek reimbursement for losses below the first-loss level in a first-loss insurance claim event. Premiums are proportionately determined, which means they are not based on the entire value of all products or property.

If someone has more than one policy for a specific hazard to their property, first-loss insurance is also assessed first when filing claims. The coverage given may be more comprehensive, which is useful for expensive assets that would be difficult or impossible to insure otherwise.

Other types of property insurance, such as coverage for water damage or coverage for theft-related losses at home, can be insured on a first-loss basis as well. A first-loss policy may have lower premiums than one that covers the entire value of your home.

The Advantages and Drawbacks of First-Loss Insurance

Paying a reduced premium for partial protection against property losses should benefit a first-loss insurance policyholder. Small business owners that don't have a huge inventory and whose overall value of items is moderate would benefit from a first-loss coverage. First-loss insurance should be a reasonable and effective option to obtain protection in this situation.

The fundamental drawback of first-loss insurance is that it does not fully indemnify—that is, it does not fully cover—the full value of a loss. If an expensive watch is worth $25,000 but the insured only has $10,000 in first-loss coverage, the owner will be out $15,000 if the watch is stolen.

A First-Loss Insurance Example

Consider the following scenario as an illustration of how this form of insurance might be used. If a store owner had $2.5 million in inventory but estimated that the maximum they could lose due to theft or burglary at any given moment would be $50,000, they could get a first-loss policy for that amount.

If the store is broken into and the owner loses more than $125,000 in stock, they will only be compensated for $50,000 of the loss, as indicated in the first-loss policy.