What defines a first loss policy?

A first loss policy is characterized by a sum insured that is agreed upon as an estimate of the maximum possible loss. This means that the insurer provides coverage up to a specified limit for losses without requiring the policyholder to meet a deductible threshold. The nature of this type of policy addresses scenarios where the insured can ascertain a likely maximum loss, enabling more straightforward claims processing and clarity in coverage.

Having an agreed sum insured allows both the insurer and the insured to understand the financial limits of coverage right from the start, thus facilitating a quick claims payout up to that limit for losses incurred. This type of arrangement is particularly useful in certain fields—such as property insurance—where the risk and potential losses can be estimated more accurately, allowing businesses to manage their financial exposure effectively.

In contrast, other responses describe different aspects that do not align with the function of a first loss policy, such as policies that pay only for losses exceeding a certain amount or focus on specific claims within a defined timeframe, which do not encapsulate the broader applicability and structure of a first loss policy.