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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0">What Is a First-Loss Policy?</h2>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-1">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 property. In return, the insurer agrees to not penalize the policyholder for under-insuring their goods or property—for example, by not raising rates on renewal premiums.</p>
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<h3 class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block-callout-heading_1-0">KEY TAKEAWAYS</h3>
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<ul class="has-black-color has-text-color has-large-font-size"><li>A first-loss policy is a type of property insurance policy that provides only partial insurance.</li><li>In the event of damage, the policyholder does not seek compensation for losses below the pre-established first-loss level.</li><li>A first-loss insurance policyholder should benefit from paying a lower premium for partial protection against property losses.</li><li>Unfortunately, a first-loss policy may leave an individual underinsured and forced to pay for some damages out-of-pocket.</li></ul>
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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0-5">Understanding the First-Loss Policy</h2>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-6">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.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-8">First-loss insurance&nbsp;is also considered first when filing any claims&nbsp;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.&nbsp;</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-10">Other types of property 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.</p>
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<p class="has-black-color has-text-color has-large-font-size"><strong>Important:</strong> First-loss policies may come with a large deductible, in which the insurance would cover the difference between your deductible and the maximum benefit you chose.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0-14">Advantages and Disadvantages of First-Loss Policies</h2>
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<h3 class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-15"><strong>Pros of First-Loss Policies</strong></h3>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-16">First-loss insurance policies are generally more affordable than traditional full-coverage policies because they provide coverage for a specific amount. As a result, policyholders pay lower premiums compared to comprehensive policies that cover the full value of their assets. This allows policyholders to select the coverage amount based on their needs and risk exposure.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-18">Like other forms of insurance, first-loss insurance is an effective risk management tool for businesses or individuals. However, unlike other forms of insurance, processing claims under a first-loss insurance policy is usually faster and more straightforward. Since the coverage is limited to a specific amount, the claims process is less complex and requires less documentation compared to comprehensive policies.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-20">First-loss policies can also complement existing insurance coverage. For instance, they can be used as an additional layer of protection on top of primary insurance policies to address specific risks or to fill gaps in coverage. Policyholders ultimately have the flexibility to choose the deductible amount they are comfortable with and premium they want to pay with a first-loss policy.</p>
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<h3 class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-22"><strong>Cons of First-Loss Policies</strong></h3>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-23">The primary downside of a first-loss insurance policy is somewhat obvious. This type of coverage is has a limited coverage amount. The policy only provides coverage up to the predetermined first-loss limit which might be insufficient to cover the full extent of a significant loss or catastrophic event. If the loss exceeds the chosen limit, the policyholder is responsible for covering the remaining expenses out of pocket.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-25">Since first-loss policies are designed to cover specific assets or risks, they do not offer comprehensive protection for all assets or liabilities. This may leave certain assets or risks uninsured or underinsured.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-27">For businesses or individuals with varying risks and assets, managing multiple first-loss policies or combining them with other types of insurance might be necessary. Unfortunately, coordinating different policies can become complicated and may require expert advice to ensure comprehensive protection. In some cases, missed gaps may leave assets uninsured or underinsured.</p>
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<p class="has-black-color has-text-color has-large-font-size"><strong>Pros</strong></p>
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<ul class="has-black-color has-text-color has-large-font-size"><li>May be more affordable than other forms of coverage</li><li>Allows for insured to tailor their coverage</li><li>May reduce overall claim complexity compared to other forms of coverage</li><li>Protects against certain types of risk</li></ul>
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<p class="has-black-color has-text-color has-large-font-size"><strong>Cons</strong></p>
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<ul class="has-black-color has-text-color has-large-font-size"><li>Has a limited coverage amount</li><li>May leave assets uninsured or underinsured</li><li>May result in the insured still having to pay out of pocket</li><li>May increase overall claim complexity based on how claims interact with each other</li></ul>
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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0-32">Tips for Determining First-Loss Insurance Limit</h2>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-33">When evaluating whether a first-loss insurance policy is for you, start by identifying the assets, properties, or risks that you want to protect. For each identified risk, conduct a risk analysis to evaluate the potential financial impact of a loss. You'll want to evaluate not only the likelihood of the risk occurring but also the severity of the potential loss.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-35">Some of the decision-making revolves around self-reflection, and you should assess your risk tolerance level. Your risk tolerance will influence the level of coverage you desire and the first loss limit you feel comfortable with. For example, consider whether you'd personally rather pay a higher premium for more coverage or a lower premium for less.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-37">When looking at your assets, consider the current market value of the items you want to insure. High-value assets may require higher first loss limits, while lower-value assets may need more modest coverage. If you are a business owner, consider potential business interruption costs when setting the limit.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-39">Insurance agents or brokers with expertise in first loss insurance can provide valuable insights. They can help you navigate the decision-making process and guide you in selecting the appropriate coverage levels. They can also help you reevaluate your policy periodically to adjust your first-loss limit to ensure it remains suitable for your evolving needs and risk exposure.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0-41">Example of First-Loss Insurance</h2>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-42">Consider this&nbsp;example of a typical situation in which&nbsp;this type of insurance might&nbsp;be in effect. If a store owner held $2.5 million worth of goods in their&nbsp;store but&nbsp;figured&nbsp;that the most they&nbsp;could lose at any one time due to theft or burglary would be approximately $50,000, they&nbsp;might obtain a first-loss policy for that amount.</p>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-44">In the event that the store was burglarized and the owner lost more than $125,000 worth of stock, they&nbsp;would only be compensated for&nbsp;$50,000&nbsp;of the loss, as stated under the first-loss policy.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size">How Is First-Loss Coverage Different from Traditional Insurance?</h2>
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<p class="has-black-color has-text-color has-large-font-size">Traditional insurance policies provide coverage for the full value of assets or risks, while first-loss insurance offers coverage only up to a specified limit. It is more tailored and cost-effective, but policyholders must prioritize their coverage based on risk exposure.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size">Can First-Loss Insurance Policies Be Combined With Other Coverage?</h2>
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<p class="has-black-color has-text-color has-large-font-size">Yes, first-loss insurance policies can be combined with other insurance coverage to create a comprehensive risk management strategy. This approach allows policyholders to address different risks effectively.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size">Can I Adjust the First-Loss Limit Over Time?</h2>
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<p class="has-black-color has-text-color has-large-font-size">Yes, policyholders can adjust the first-loss limit to reflect changes in their risk profile or asset values. This flexibility allows for tailored coverage that aligns with evolving needs.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size">How Do I Obtain a First-Loss Insurance Policy?</h2>
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<p class="has-black-color has-text-color has-large-font-size">To obtain a first-loss insurance policy, individuals or businesses can contact insurance providers or brokers specializing in this type of coverage. They will guide you through the process of assessing risks and selecting appropriate coverage limits for your unique situation.</p>
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<h2 class="has-black-color has-text-color has-extra-large-font-size" id="mntl-sc-block_1-0-54">The Bottom Line</h2>
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<p class="has-black-color has-text-color has-large-font-size" id="mntl-sc-block_1-0-55">First-loss insurance policies offer coverage up to a specified limit, allowing policyholders to prioritize protection for high-value assets or specific risks. They are cost-effective, customizable, and suitable for individuals or businesses with diverse risk exposures.</p>
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<p></p>
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<p>To read the full article, <a href="https://www.investopedia.com/terms/f/first-loss-policy.asp">click here.</a></p>
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