Application of Retention
What Is an Application of Retention?
An application of retention is a contractual clause remembered for some insurance policies. The purpose of the clause is to indicate which portion of any potential damages should be paid for by the policyholder. Damages in excess of this retained portion would then be covered by the insurance policy.
For example, if a [car insurance](/collision protection) policy has a $1,000 deductible and a loss is valued at $2,500, then, at that point, the application of retention for that policy would explain that the policyholder is responsible for payment of the $1,000 deductible. The insurer's liability would consequently be limited to $1,500.
How Applications of Retention Work
Applications of retention are an important part of insurance contracts since they explain which percentage of a claim is attributable to one or the other party. On the off chance that a policyholder fails to carefully survey the application of retention, they may accidentally open themselves to more risk than they anticipated.
For example, in the above model, a driver who purchases vehicle insurance might fail to understand that they are responsible for a $1,000 deductible. Assuming they are in an accident and have failed to set to the side adequate funds, they could be forced to take out loans to pay for the deductible. In extreme cases, a policyholder might even be forced into bankruptcy.
At times, the insurer might consent to pay for the retention as a loan, for example, the $1,000 deductible in this model. In that scenario, the policyholder would consent to pay back the funds inside a predetermined period of time and would probably have to pay interest to the insurer. Commonly, be that as it may, the insurance company would be under no obligation to give this loan, making it essential for policyholders to save ahead of time or secure different wellsprings of financing.
A few policies, for example, directors and officers liability insurance for corporations, may treat retention diversely in the case that the company is in bankruptcy procedures. On the off chance that a company is bankrupt, it is doubtful to have the option to give self-insurance coverage for the amount of loss that it should hold.
Thus, the insurer might 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 need to contain a specific provision showing that losses are to be dealt with diversely during bankruptcy.
Certifiable Example of an Application of Retention
It is important to note that, albeit the terms "retention" and "deductible" are frequently utilized reciprocally, they are as a matter of fact two separate concepts. To show, consider the case of a policyholder claim under their medical coverage policy in the wake of visiting a doctor.
Technically, the full amount paid upfront for the service is viewed as the retention, while the policyholder repays the insurance company for the deductible. The specific breakdown of which portion of the visit is covered by the insurance company, rather than being the responsibility of the policyholder, would be set out in the insurance policy's application of retention.
- An application of retention is a declaration normally remembered for insurance contracts.
- It indicates which portion of any potential claims would be covered by the policyholder and the insurance company, separately.
- "Retention" and "deductible" are comparative concepts, however they have distinct implications.