Maximum Possible Loss vs. Maximum Probable Loss

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by Christopher J. Boggs, CPCU, ARM, ALCM

Potential exists for an entire structure to be destroyed by a peril (fire, wind, water, etc); thus the maximum possible loss is the value of the entire structure and all the contents. However, the probability that the entire building will be destroyed varies based on the protective safeguards in place, construction materials, size and occupancy; the combination of these factors yields the estimated maximum probable loss.

Maximum possible loss is the “worst case scenario” and the most pessimistic view – the entire building and everything inside could be destroyed (such loss could be considered a “shock loss”). Other terms for maximum possible loss are “amount subject to loss” and “maximum foreseeable loss.”

Maximum probable loss is inversely proportional to the size of a structure and the effectiveness of any protective safeguards. The larger the building, the less likely the entire property will be destroyed; and the better the fire protection (sprinklers, alarms and public protection) the more likely a fire will be contained and extinguished before the entire building is destroyed. The occupancy and contents within the building also affect the amount of damage likely to occur. Probable maximum loss (PML) is alternative terminology.


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Comments

  • January 31, 2013 at 10:40 am
    jenipher cardozo says:

    is it a way of determined sum insured

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