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 the policyholder 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.
Subjects: Financial Institutions and Services.