DEFINITION of ‘Application Of Retention’
Insurance contract language that specifies how much loss the insured is to retain for certain types of risk. Application of retention specifies whether per occurrence or per accident losses are covered up to a certain amount through self-insurance. Insurance companies are only responsible for losses in excess of this retention.
BREAKING DOWN ‘Application Of Retention’
Liability insurance policies 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.
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, self-insures, or does not set aside funds. In some cases, the insurer may agree to pay for the retention as a form of 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 claim, and are applied separately. The sum of the retentions is typically limited to the largest retention.
Some policies, such as directors and officers (D & O) liability insurance policies, 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, and the insurer may therefore 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 treated differently during bankruptcy.