What Is First Loss Insurance?
First loss insurance is a policy that is considered first when filing any claims, if someone carries multiple policies for a named peril. It is a type of underinsurance for situations where carrying a full policy is not feasible or recommended. The coverage provided can be more comprehensive, which can be important for costly assets that might be difficult to insure. If this product would be appropriate for a client, a representative can provide information about a company’s policies and options.
People may carry multiple policies to protect themselves if they cannot afford to take any losses on a named peril. The first loss insurance policy in this case covers claims up to a certain amount, at which point they revert to another policy. This arrangement can allow policyholders to save money on some kinds of policies and receive complete coverage in the event of a disaster. It’s important to check the policies carefully against each other to make sure all terms are understood.
In an example, a warehouse owner might carry coverage for the facility and contents that includes a large deductible. The policy can cover high losses, but the deductible may be big enough that it could pose a problem. A first loss insurance policy can be taken out to pay the deductible, but no more, in the event of a covered peril like a fire. In combination, the two policies offer complete coverage.
It can also be used as a form of partial insurance to supplement a policy held by someone else. For example, someone who buys an apartment doesn’t carry insurance on the whole building, although the building’s policy could cover earthquakes, fires, and similar events. If something happens in the apartment, the building policy might not cover it. A first loss policy can be purchased to provide some protection in the event of an issue like a kitchen fire or flooding in the bathroom.
Insurance companies are underinsuring when they write a first loss insurance policy, because the value of the coverage is less than that of the insured asset. They agree to provide this type of coverage as a supplement to an existing policy which will kick in if a serious event occurs. Carrying first loss insurance may be required in some situations, particularly loans, if there are concerns about whether a policyholder can afford a deductible. Banks offering loans on apartments, for example, don’t want to have to foreclose on an uninhabitable apartment after a disaster that wasn’t covered by insurance.
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