Retained Limit – Self-Insured Amount Before Excess Applies
In plain language: Retained limit is like a deductible but for businesses. It's the amount the company agrees to pay, usually in significant claims, before their extra insurance (like an umbrella policy) steps in.
Technical definition: Retained limit is a term most often found in excess liability policies such as umbrella or excess liability insurance. It represents an amount of liability that the insured must assume before the excess liability coverage form comes into effect. Retained limit is incurred and paid by the policyholder before any policy benefits are activated under the excess liability policy.
Imagine a small business owner who has been sued for a large amount of money, more than her regular business liability coverages could pay. She will have to pay a certain amount (retained limit) before her commercial excess liability insurance kicks in.
TL;DR
What Is Retained Limit in Insurance?
Retained limit is the amount of loss that must be borne by the policyholder before the excess liability coverage begins. It makes sense mainly where the insurer has other, underlying policy coverage for the risk. The retained limit is usually the amount of the deductible in the underlying policy, but it can also be a larger amount. Sometimes it is referred to as a "self-insured retention limit," and indicates the net amount at risk the policyholder is willing to accept.
While akin to a deductible, a retained limit is a little different. Unlike deductibles which are subtracted from the claim payment, a retained limit is the sum assured minus the claim payment, which the policyholder must exhaust before the excess policy covers the losses. The requirement of a retained limit emphasizes that the underlying policy is the first defense line, and the excess liability policies only come into account when the claim amount exceeds the retained limit.
Key Related Terms to Know
Common Questions About Retained Limit
What happens if the claim amount is less than the retained limit?
If the claim amount is less than the retained limit, your client must pay the entire claim amount. The excess liability insurance is not triggered unless the claim amount exceeds the retained limit.
Can the retained limit change?
Yes, the retained limit may change. This is determined by the underwriting criteria set by the insurance company and the willingness and ability of the client to absorb a certain level of risk.
Is a higher retained limit always a bad thing for my client?
Not necessarily. A higher retained limit may result in lower premiums for the excess liability policy. However, it also means the client assumes more financial risk at the onset of a claim.
How does the retained limit work with an umbrella insurance policy?
The umbrella policy begins when the coverage limit of the underlying policy is exhausted, and the retained limit has been paid. The umbrella policy then pays up to its own limit, providing additional liability protection for the client.
Can my client choose their retained limit?
Yes, to some extent. The actual retained limit will often be a negotiation between the insured and the insurance company, frequently affected by contract insurance requirements, risk management objectives, and the insurer's underwriting criteria.
Retained Limit vs Underlying Policy
Underlying policies and retained limits are both pivotal aspects of insurance, especially in handling large liability claims. A higher retained limit can reduce premiums but increase out-of-pocket costs in case of a claim.
|
Comparison Area |
Retained Limit |
Underlying Policy
|
|
Primary use case |
To determine the claim amount policyholder must pay before excess liability policy kicks in |
Offers primary coverage for losses |
|
Coverage / concept type |
Self-insured deductible amount |
Base coverage before excess or umbrella policies |
|
Typical exclusions |
Dependent on policy specifics, typically similar to those in underlying policies |
Varies widely depending on policy type |
|
Who is most affected by errors |
Insured, as it impacts amounts they must pay in a claim |
Insured, as it impacts their primary coverage |
|
Common mistakes |
Underestimating the out-of-pocket risk at claim time |
Failing to review policy limitations and not enhancing coverage when necessary |
Real Claim Examples Involving Retained Limit
Scenario 1: A manufacturing company had a liability claim totaling $2 million. They had a retained limit of $1 million on their commercial excess liability policy. They were responsible for the first $1 million of the claim, which was offset by their primary insurance policies. The excess policy covered the remaining amount and ensured the company could continue operations.
Scenario 2: A retail store had a major slip-and-fall claim. Their primary business liability coverages did not fully cover the award. The retained limit meant that they needed to contribute a specified amount out-of-pocket before their excess liability policy covered the remainder of the claim.
Scenario 3: A construction firm faced a high-value lawsuit. Their commercial general liability policy covered up to a certain limit. The claim exceeded this, triggering the firm's excess liability policy. The firm was responsible for the retained limit before their excess policy covered the claim's remaining cost
Limitations and Common Mistakes
Scenario 1: A manufacturing company had a liability claim totaling $2 million. They had a retained limit of $1 million on their commercial excess liability policy. They were responsible for the first $1 million of the claim, which was offset by their primary insurance policies. The excess policy covered the remaining amount and ensured the company could continue operations.
Scenario 2: A retail store had a major slip-and-fall claim. Their primary business liability coverages did not fully cover the award. The retained limit meant that they needed to contribute a specified amount out-of-pocket before their excess liability policy covered the remainder of the claim.
Scenario 3: A construction firm faced a high-value lawsuit. Their commercial general liability policy covered up to a certain limit. The claim exceeded this, triggering the firm's excess liability policy. The firm was responsible for the retained limit before their excess policy covered the claim's remaining cost
How to Explain Retained Limit to Clients
Personal Lines client: "Think of your retained limit like your deductible, but for big claims. It's how much you will pay out of pocket before your extra insurance steps in."
Small Business owner: "Your retained limit is a buffer. If there's a claim, it's the money you'd pay before your business's excess or umbrella insurance policy starts paying."
CFO or Risk Manager: "Retained limit is a key element of your risk management strategy. It's the self-insured amount that your company must handle before triggering the excess liability insurance. It's crucial to ensure your organization's financial ability to cover this in case of major lawsuits or claims."