first-loss policy

first-loss policy: A property insurance policy in which the policyholder arranges cover for an amount below the full value of the items insured and the insurer agrees not to penalize him for under-insurance. The main use of these policies is in circumstances in which a total loss is virtually impossible. For example, a large warehouse may contain £2. 5M worth of wines and spirits but the owner may feel that no more than £500, 000 worth could be stolen at any one time. The solution is a first-loss policy that deals with all claims up to £500, 000 but pays no more than this figure if more is stolen. First-loss policies differ from coinsurance agreements with the policyholders because the insured is not involved in claims below the first-loss level and the premiums are not calculated proportionately. In the above example, the premium might be as much as 80-90% of the premium on the full value.

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