What Is Application Of Retention?
Application of retention is language included within an insurance policy that specifies how much of a loss the insured is to retain themself for certain types of risk. Application of retention specifies whether losses are covered on a per-occurrence or per-accident basis, up to a certain amount through self-insurance. Insurance companies are only responsible for losses in excess of this retention.
For instance, if a car insurance policy has a $1,000 deductible and a loss is valued at $2,500, the car owner would have to self-insure for $1,000 and the insurer would be responsible for $1,500.
- Application of retention specifies in an insurance policy how much in the case of a loss the policyholder is responsible for themself.
- The deductible on many types of insurance, which the policyholder must pay out of pocket first before the insurer begins to pay, is a form of retention.
- The main difference between a deductible and other forms of application of retention, is that deductible must be paid in first, while other applications of retention are often first to be paid.
Understanding Application Of Retention
Application of retention applies to liability insurance policies that may require the policyholder to retain losses until a certain limit is reached, after which the policy coverage will begin. This is called retention, and is similar to self-insurance in that the retention serves a similar function to a deductible. The amount of loss below the policy threshold is considered non-indemnified, meaning that a calculation of actual financial is not applied at the time of loss.
Application of retention is defined in the language of the insurance policy and is considered a type of declaration. The insurer will not be responsible for this retention, regardless of whether the insured pays a deductible, is self-insured, or does not set aside funds. In some cases, the insurer may agree to pay for the retention as a form of a loan, with the insured party agreeing to pay back the funds within a specific period of time.
Applications of retention may be set at different rates for different types of claims, and they are applied separately. The sum of the retentions is typically limited to the largest retention.
Various Treatments of Retention
Some policies, such as directors and officers liability insurance for corporations, may treat retention differently in the case that the company is in bankruptcy proceedings. If a company is bankrupt, it is less likely to be able to provide self-insurance coverage for the amount of loss that it is supposed to retain. As a result, the insurer may be held responsible for the amount of the retention.
For this type of coverage to be extended to the insured company, the language of the policy would have to contain a specific provision indicating that losses are to be treated differently during bankruptcy.
Difference between Retention and Deductible
The majority of people are more familiar with the term deductible than with retention and often use it interchangeably even when retention is technically more correct. Although their meaning is similar, there is a difference between retention and deductible.
The biggest difference is that the retention is paid first. Consider health insurance, for example. The insured usually has to pay a certain dollar amount of their medical bills first, before the insurance company begins to pay the benefits. While most people consider the initial uncovered amount to be the deductible, it is actually the retention. The deductible actually refers to what the insured has to pay out of pocket. Retention is paid upfront, whereas the insured reimburses the insurance company for the deductible.