Loss prevention insurance protects against unexpected loss of property value due to specified events, particularly theft. It is often purchased as part of a comprehensive business insurance policy and covers instances of theft that fall outside the normal industry standard loss rate. Businesses and banks also purchase this insurance to protect against embezzlement and misappropriation of assets.
Loss prevention insurance protects the insured against the unexpected and uncontrollable loss of the value of the property covered against the occurrence of specified events. While any type of casualty insurance is technically designed to indemnify the policyholder against loss, the term “loss prevention” has a business context related to the risk of loss through theft. This type of coverage is typically purchased as part of a company’s comprehensive business insurance policy and is treated as a cost of doing business.
In retail, inventory is turned into cash when sales are made to customers in the normal course of business. There is a certain percentage of inventory that will not show up as cash on the books when the sales transactions are finally reconciled with the remaining inventory. This missing inventory or cash represents a loss to the business commonly known as shrinkage. The retail industry has a standard percentage of retracements that are considered an expected part of trading, while anything above that standard percentage is considered an unusual loss.
Shrinkage can be the result of many things, such as a clerical or vendor error in tracking inventory. The bulk of a loss percentage is usually made up of theft from a combination of internal and external sources. Employees develop schemes to steal goods and money, and customers shoplift in addition to committing check and credit card fraud. A company purchases loss prevention insurance as part of its comprehensive coverage to indemnify itself against unusual instances of theft that fall outside the normal industry standard loss rate.
For example, if an employer discovered that an employee had managed to steal tens of thousands of dollars over time despite company controls to prevent such activity, loss prevention insurance would reimburse the business up to the policy amount. This is an important safeguard for a company because money stolen by employees is often spent and never fully recovered. Employee theft for a certain amount of money is considered a catastrophic incident that is possible but unexpected, in the same way that car theft is recognizable but never expected, so insuring the risk is good business practice.
Businesses and banks also purchase loss prevention insurance. In this context, insurance typically protects against large instances of embezzlement of funds and misappropriation of assets, particularly by top management. A bank policy usually also protects against theft and fraud by third parties as well as employees.
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