At its core, the idea behind passive retention is simple: it's a term used to describe a situation when a organization unknowingly retains some level of risk, which ultimately leads to losses. For the most part, this happens when the entity in question has failed to properly identify their exposures to loss, whether it be property risks or liability risks, and therefore does not have a plan to finance the risk, whether internally through a retention fund or externally through contract (insurance, risk pool or contractor). Essentially, passive retention will occur through inaction - meaning that you either didn't identify the risk, or were aware that some risk was present, but failed to take the appropriate steps to mitigate it.
Passive versus Active Retention
For the sake of example, let's say you're a homeowner that also owns a collection of old, antique books. In a passive retention situation, you have no idea of the value of those books and either assume they can be easily replaced or have never given it a second thought. In the unfortunate event of an incident like a fire that causes a total loss, you realize that those books are in fact quite valuable - but because they weren't properly disclosed, the claims settlement may be far less than historic value of the books, which is set by an appraisal.
In an active retention situation, you would have taken the care to research those books beforehand - at which point you would have learned that they were worth a great deal of money. This would have been properly noted on your insurance coverage well in advance so when that unfortunate fire struck, you would be properly compensated for them and they could be replaced.
This happens in the world of business as well, where an organization might purchase an asset and then fail to determine how much, if any, of the risk is to be retained. If a tornado happens and everything on the site is damaged, without the proper planning, either through establishment of a retention fund or transfer, an unexpected financial loss will occur.
Again, this is important enough to the point where it bears repeating: even if you don't know you own it, which means it isn't listed for coverage, improperly valued, or a liability that is excluded on current coverages; you risk suffering an unplanned financial loss. Active retention allows for a loss to be absorbed with no surprises.
The Best Defense is a Good Offense
In the end, the most important thing to understand is the idea that increasing the amount of information available enables you to avoid those unexpected surprises.
With that in mind, it is of critical importance to:
- Identify unusual or unique liability risks that require specialized coverage.
- Identify property (autos, building or other property locations, equipment, or other tangible assets) that can be damaged or destroyed by fire, wind or other peril.
- Based on the risk identification process and the organization's tolerance for risk, develop a risk management strategy to determine which assets and liabilities are to be covered by insurance and which can be "actively retained" within budgeted funds.
Avoid passively retaining risk by developing a process as outlined above.
If you would like to speak to our loss prevention department for a risk assessment to identify hazards and loss exposures, or member services for questions related to coverage, please contact our team.
The Texas Municipal League Intergovernmental Risk Pool is the leading provider of workers’ compensation, liability, and property coverage for local governments in Texas. Founded in 1974, we are the oldest and largest pool of its type in the United States, serving over 2800 governments and political subdivisions. We are driven to continue the mission that began over 40 years ago, providing our members with a tailored risk financing system through reliable partnership, performance, and service.
If you are currently looking for coverage, or have any questions please contact our team with any questions.