First Loss Insurance is a type of coverage in property insurance, commonly used in international trade and cargo insurance. Its core feature is that the insured amount is less than the actual value of the insured subject matter (i.e., underinsurance), but the insurer agrees that in the event of a loss, it will not apply proportional sharing; instead, it will indemnify the first loss portion in full up to the insured amount. For example, if the actual value of cargo is USD 1,000,000 and First Loss Insurance is taken out for USD 500,000, and a loss of USD 600,000 occurs, the insurer pays USD 500,000; if the loss is USD 400,000, it pays USD 400,000. Use cases: suitable for cargo with low loss frequency but where a partial loss rather than a total loss may occur, such as high-value, low-risk goods, or when an enterprise wishes to save on premiums. Notes: First Loss Insurance is not applicable to all types of coverage and usually requires special agreement with the insurer; the insured must clearly define the first loss limit to avoid misunderstanding it as full insurance. Difference from proportional indemnity: under proportional indemnity, underinsurance is paid in proportion to the ratio of insured amount to insured value; under First Loss Insurance, payment is made in full within the insured amount, without proportional sharing. Difference from total loss cover: total loss cover only pays for total loss, while First Loss Insurance can pay for partial loss.
📝 Examples
1. We exported a batch of precision instruments with an actual value of USD 800,000. To save on premiums, we took out First Loss Insurance with an insured amount of USD 400,000. Later, a collision during transport caused a loss of USD 500,000, and the insurer paid USD 400,000 under the First Loss Insurance clause. (Note: The loss exceeded the insured amount, so payment was made in full up to the insured amount.)
2. When importing steel, considering the low probability of partial loss to steel, we agreed with the insurer to adopt First Loss Insurance, with the insured amount at 60% of the cargo value. If a 30% loss occurs, the insurer will pay the actual loss in full, rather than paying at a 60% ratio. (Note: The loss was lower than the insured amount, so payment was made according to the actual loss.)
💡 Foreign Trade Tips
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