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FIRST LOSSES EXPLAINED
- Most insurance polices carry a first loss, being the amount you must retain for your own account before recoursing on the insurerThe first loss was introduced many years ago for a number of reasons:-
1) It is (apparently) said in law that it is not legal to make a profit out of a loss, i.e. insurance is there to "compensate", so:
a) Insurance in whatever form is there to compensate you against a loss, it is not there to cover any profit element, unfortunately it would be an administrative nightmare to look at each claim and identify invoice by invoice what was the true cost of the loss is excluding the profit element, so an indemnity percentage is applied which will hopefully reflect or balance out any variations.
2) If 100% was automatically given then the policyholder is more likely to act recklessly when giving credit, as they would know that they can`t lose whether they get paid by the debtor or not. Whereas, if the insured have to retain a portion of the debt then they are more likely to act responsibly as it is in their own monetary interests to do so.
Threshold: Any insured loss below the set Threshold figure is for the insured`s own account, however losses above this figure will receive the full indemnity. So debts of up to £1,000 on a T/H £1,000 would not be payable, thereafter the prevailing rate of indemnity will apply to the whole debt.
Minimum Retention: In the event of a claim, the insured must retain either the set minimum retention figure or the uninsured percentage whichever is the greater. e.g.: M/R £1000 or uninsured 15%. On a debt of £5k the uninsured percentage would be £750 therefore the Minimum retention of £1000 would apply giving a final payment of £4,000.
Each & Every: The Each & Every figure is deducted off every insured loss with the insured receiving the insured percentage of the balance. e.g. debt £5k less E&E £750 = £4,250 less 15% indemnity = final payment £3,612.
Non Qualifying Loss: This is the same as the threshold whereby any insured loss below this figure is for your own account. Insured losses above this figure receive the full indemnity, it is sometimes used in conjunction with an aggregate deductible.
Aggregate First Loss OR Aggregate Deductible: Non Qualifying losses up to an agreed figure are for the insured`s own account and only losses above this figure will go towards the AFL, when the AFL level has been exceed then payment on further debts (above the NQL) will be paid on the agreed level of indemnity. i.e. AFL £25k, claim £30k, the insurers liability is £5k and the agreed percentage is then payable. The AFL figure can be either an large individual loss or maybe several small losses (it is losses adding up to the AFL level on a cumulative basis).
Indemnity: AFL policies usually attract a higher indemnity and 100% is often agreed simply because the insured has already retained an element of the debt or accumulative debts.
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