Loss prevention insurance protects the insured against the unexpected and uncontrollable loss of the value of covered property from the occurrence of specified events. Although any type of casualty insurance is technically designed to indemnify the insured against loss, the term “loss prevention” has a business context that relates to the risk of loss from 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 over the ordinary course of business. There is a certain percentage of inventory that will not show up as cash on the books when sales transactions are ultimately reconciled against the remaining inventory. This missing inventory or missing cash represents a loss to the business commonly known as shrinkage. The retail industry has a standard percentage of shrinkage that is considered an expected part of doing business, while anything over that standard percentage is considered an unusual loss.
Shrinkage can be the result of any number of things, such as a vendor or administrative error in tracking inventory. The largest part of a loss percentage is often made up of theft from a combination of internal and external sources. Employees develop schemes to steal merchandise and money, and customers shoplift as well as commit check and credit card fraud. A business buys loss prevention insurance as part of its comprehensive coverage to indemnify itself against unusual instances of theft that fall outside of the industry standard normal rate of loss.
For example, if an employer found out that an employee had managed to steal tens of thousands of dollars over the course of time despite company controls that are in place to prevent such activity, loss prevention insurance would reimburse the business up to the amount of the policy. This is an important protection for a business because money stolen by employees is often spent and never fully recovered. Employee theft over a certain amount of money is considered a catastrophic incident that is possible but unexpected, much in the same way as the theft of a car is cognizable but never expected, so insuring the risk is a good business practice.
Corporations and banks also buy loss prevention insurance. In this context, the insurance typically protects against major instances of embezzlement and diversion of assets, particularly by upper management. A bank policy often also protects it against robbery and fraud by third parties as well as employees.