Allstate Insurance and The Home Depot are partnering to save the insurer as much as $50 million a year in home-repair expenses by encouraging contractors to buy building supplies from the hardware superstore.

The agreement allows Allstate adjusters to refer policyholders with property damage claims to one of Home Depot's 977 United States stores to buy floor covering, building products, and installation services. Under this program, Allstate bases claim payouts on the cost of using contractors affiliated with Home Depot and the price it pays for the materials. Checks are sent directly to the policyholders.

Allstate policyholders are not required to use Home Depot materials to replace their losses, according to Allstate spokesperson Justin Schmitt, but the insurer expects it will send a "significant" amount of business to the Atlanta-based retail chain.

The deal stands to provide a number of benefits to both companies. Headquartered in Northbrook, Ill., Allstate pays out nearly $2.8 billion in property claims annually and estimates it could save between $30 million and $50 million this year if customers hire contractors who buy low-cost replacement goods at Home Depot. Although the superstore won't get every Allstate customer, it will benefit by having an ongoing source of home-repair referrals from the second-largest U.S. home insurer.

When many companies sell similar products, excellent customer service is the primary way a competitor can distinguish itself, thereby gaining an "edge," according to Daniel Hoppes, Home Depot's director of national insurance programs.

This edge is the force driving an increasing number of new business alliances between insurers and merchandisers. For instance, Sears, Roebuck and Co. has teamed with The Hartford to offer its more than 60 million Sears customers and employees the chance to purchase auto, home, personal umbrella, and personal watercraft insurance from the Sears Auto & Home Insurance Program.

"Holding on to the customer is everything," Hoppes says, especially in the field of insurance where new business is not profitable until several years into the relationship between the insurer and the policyholder.