An insurance retention is the amount of loss that you agree to retain after a covered loss. Insurance retention requirements are intended to encourage you to take steps to avoid losses and result in savings for both you and your insurance company. The deductible under your homeowners or renters policy or under your auto insurance policy is considered a type of retention.
There are several different types of insurance retentions. For personal insurance coverages the policy deductible is typically a flat dollar amount representing the amount of each loss that you will absorb before insurance applies. The deductible applies to losses incurred to your own property or possessions. For example, suppose you select a $500 deductible on your auto insurance policy. The deductible applies to damages to your vehicle. If your vehicle sustains hail damage resulting in a $475 repair bill, you will be responsible for paying the full amount of the claim because the total damages have not exceeded your deductible. If, however, a small fire breaks out in your home and results in a loss totaling $10,000, assuming your loss is covered your insurance company will be liable for $9,500 -- the amount of the loss remaining after the deductible.
Deductibles as a Percentage
An insurance deductible may also be expressed as a percentage of the amount of insurance. This type of deductible is commonly required for losses resulting from hurricanes or for coverage purchased specifically to cover losses from earthquakes. For example, suppose you live in a hurricane-prone state and carry a 5 percent deductible. If your home is insured for $300,000, your deductible is $15,000. Earthquake deductibles can be even higher -- often as high as 25 percent of the amount of insurance covering the home.
Another type of insurance retention is a self-insured retention. The self-insured retention functions like a deductible, but the term is normally applied to liability insurance policies. A self-insured retention is the amount of any liability loss (meaning a loss for which you are liable for bodily injury or damage to another) that you must pay to the injured third party before the insurance company pays. Typically, only insurance policies covering businesses require self-insured retentions. Personal insurance policies do not require retention amounts for liability coverages -- with one exception: Personal umbrella policies purchased to provide excess liability coverage over your homeowners and auto policies do require a retention amount. That amount, however, is satisfied by maintaining adequate coverage under the underlying homeowners and auto policies.
Retention Requirements Save You Money
Insurance retentions save insurance companies money in two ways. First, retention requirements help to encourage policyholders to take steps to avoid losses. Second, retention requirements result in fewer small claims being submitted. Aside from the cost of a claim itself, insurance companies incur expenses related to adjusting claims such as adjuster salaries and administrative costs. The good news is that the savings are passed along to you. You can lower your insurance premiums by raising your deductibles. After a few loss-free policy periods you may save more than the extra amount of your deductible.
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