Do you know the difference between a deductible and a retention? If not, I have good news for you. This article will clear up all of the confusion and send you on your way to make a good decision and not let anymore of your $100 bills go down the drain.
As we continue our series on the basics of professional liability, the next logical step is to talk about deductibles and retentions. While the terms are often used by agents and insurers interchangeably, the truth is that there is a pretty significant difference between the two, and knowing the difference is definitely to your advantage.
Many people know what a deductible is because they have had experience with it in their own lives with either their home owner's insurance or their personal auto policy. However, it doesn't necessarily work the same in a third party coverage. A deductible is basically the amount of a claim that you are responsible for before a carrier begins to pay any money. More formally defined, the deductible is the amount specified in an insurance policy that is subtracted from a loss in determining the amount of insurance recovery. In third party liability, typically a carrier will pay the claim amount on your behalf and then bill you back for the deductible. It does not always work this way, but most of the time it does. Therefore, having a deductible can be a cash flow advantage to your organization.
A retention is more narrowly named a Self Insured Retention. A self insured retention is different than a deductible in that it is the amount of a claim that you must pay out of your pocket before the policy will respond. Formally defined, a retention is a dollar amount specified in an insurance policy that must be paid by the insured before the insurance policy will respond to a loss. In other words, if you have a $10,000 self insured retention, you are responsible for the first $10,000 of a claim before the carrier has any responsibility at all.
While a deductible can be paid out by the carrier and billed back to the client, it also reduces the total limit of insurance available to that client. A retention does not reduce the available limit of insurance on a policy unless specified. Therefore, your entire limit of liability insurance sits on top of your self insured retention layer.
Other things to consider include:
What is your company's risk taking appetite? How much risk are you willing to take? Do not overextend yourself because you think you are lowering your premiums. Make a good business decision.
What are the tax advantages between a deductible and a retention? I am not an accoun
tant, so I will not put the limited amount that I know on this subject into writing. However, I can tell you that there are advantages to each depending on your accounting. Knowing the net present value of future dollars and having the ability to write off expenses as they are incurred are both things to consider.
How are deductibles and retentions applied? Are groups of related incidents lumped together and considered to be one event? or is the deductible applied separately to each incident? This is definitely something worth knowing.
What dollar amounts are available? and Where is the break-even point in the risk/reward equation? At some point, the amount of risk you incur for a higher deductible is not worth the premium savings. You should look at several options to be sure you are maximizing your use of capital.
Professional liability can be cumbersome without taking each of these things into consideration, but hopefully you can see the types of things that can sneak up and bite you when you aren't looking. Should you have any specific questions on this topic or on professional liability in general, please don't hesitate to use my contact information below.
As we continue our series on the basics of professional liability, the next logical step is to talk about deductibles and retentions. While the terms are often used by agents and insurers interchangeably, the truth is that there is a pretty significant difference between the two, and knowing the difference is definitely to your advantage.
Many people know what a deductible is because they have had experience with it in their own lives with either their home owner's insurance or their personal auto policy. However, it doesn't necessarily work the same in a third party coverage. A deductible is basically the amount of a claim that you are responsible for before a carrier begins to pay any money. More formally defined, the deductible is the amount specified in an insurance policy that is subtracted from a loss in determining the amount of insurance recovery. In third party liability, typically a carrier will pay the claim amount on your behalf and then bill you back for the deductible. It does not always work this way, but most of the time it does. Therefore, having a deductible can be a cash flow advantage to your organization.
A retention is more narrowly named a Self Insured Retention. A self insured retention is different than a deductible in that it is the amount of a claim that you must pay out of your pocket before the policy will respond. Formally defined, a retention is a dollar amount specified in an insurance policy that must be paid by the insured before the insurance policy will respond to a loss. In other words, if you have a $10,000 self insured retention, you are responsible for the first $10,000 of a claim before the carrier has any responsibility at all.
While a deductible can be paid out by the carrier and billed back to the client, it also reduces the total limit of insurance available to that client. A retention does not reduce the available limit of insurance on a policy unless specified. Therefore, your entire limit of liability insurance sits on top of your self insured retention layer.
Other things to consider include:
What is your company's risk taking appetite? How much risk are you willing to take? Do not overextend yourself because you think you are lowering your premiums. Make a good business decision.
What are the tax advantages between a deductible and a retention? I am not an accoun
tant, so I will not put the limited amount that I know on this subject into writing. However, I can tell you that there are advantages to each depending on your accounting. Knowing the net present value of future dollars and having the ability to write off expenses as they are incurred are both things to consider.
How are deductibles and retentions applied? Are groups of related incidents lumped together and considered to be one event? or is the deductible applied separately to each incident? This is definitely something worth knowing.
What dollar amounts are available? and Where is the break-even point in the risk/reward equation? At some point, the amount of risk you incur for a higher deductible is not worth the premium savings. You should look at several options to be sure you are maximizing your use of capital.
Professional liability can be cumbersome without taking each of these things into consideration, but hopefully you can see the types of things that can sneak up and bite you when you aren't looking. Should you have any specific questions on this topic or on professional liability in general, please don't hesitate to use my contact information below.
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