First Loss Policy

The idea

A first loss policy is a burglary insurance arrangement in which the sum insured is fixed at the largest loss that could realistically occur in one burglary, and not at the full value of the property at risk. That figure is the first loss limit. It is set by looking at the nature of the stock, the layout of the premises and how accessible they are.

The arrangement can suit premises holding bulky stock, such as godowns and warehouses, where only a fraction could be carried away in a single incident. Where the whole stock is small and portable, as in a jewellery shop or a flat holding valuables, a burglar could take everything, so first-loss logic does not apply and full-value cover is the usual basis.

Declared value and the average clause

The insured declares the total value of the property at risk. Provided that declaration is accurate, losses are paid in full up to the first loss limit, with no average deduction. The waiver of average is conditional: the declared total value must be not less than the actual total value of the property at risk.

If the total value is understated, the policy wording may reduce the claim proportionately. Under a wording that applies average in this way, claim = (declared value ÷ actual value) × loss. Wordings differ, so the policy's own clause decides how under-declaration is treated.

The trade-off

Premium is rated on the full declared total value and then scaled for the first-loss percentage chosen, under the insurer's own scale. Because the sum insured is the first loss limit and not the full value, the premium is lower than for full-value cover.

The cost of that saving is a ceiling. Any loss above the first loss limit is borne by the insured, so a limit set too low can leave a large uninsured loss.

Keeping it current

Stock levels change over time. At renewal both the declared total value and the first loss limit need to be brought in line with current stock. Otherwise the policyholder risks a proportionate reduction for under-declaration, or a limit that no longer matches the largest realistic loss.

Rules at a glance

Key points

• The first loss limit is the maximum probable loss from a single burglary, not the full value of the stock.
• The structure fits bulky stock in large godowns and warehouses, not small portable valuables.
• Losses within the limit are paid in full only if the declared total value is not less than the actual value.
• If the declared value is understated, the wording may apply average: (declared value ÷ actual value) × loss.
• Any loss above the first loss limit stays with the insured.
• Declared value and limit are both reviewed against current stock at renewal.

Common misunderstandings

• A first loss policy does not do away with average altogether: the waiver holds only while the declared total value is not less than the actual value.
• The first loss limit is not the declared value: the limit caps the claim, while the declared value is the full value at risk on which premium is rated.
• A lower premium is not free: every rupee of loss above the first loss limit is borne by the insured.
• Last year's figures do not carry forward safely: if stock has grown, both the declared value and the limit may be out of date.

Questions people ask