diff --git a/src/plugins/install.test.ts b/src/plugins/install.test.ts
index 3f7eaedb15c..85abb964c81 100644
--- a/src/plugins/install.test.ts
+++ b/src/plugins/install.test.ts
@@ -2880,21 +2880,28 @@ describe("installPluginFromNpmSpec", () => {
     expect(requests[0]?.request.kind).toBe("plugin-npm");
   });
 
-  it("reports install mode to policy when update-mode reactivates retained-only generations", async () => {
+  it("reports install mode to policy when update-mode reactivates retained generations", async () => {
     const root = suiteTempRootTracker.makeTempDir();
     const npmDir = path.join(root, "npm");
     const extensionsDir = path.join(root, "extensions");
     const packageName = "@acme/policy-generation-plugin";
     const legacyProjectRoot = resolvePluginNpmProjectDir({ npmDir, packageName });
     const generationProjectRoot = resolvePluginNpmGenerationProjectDir({
+      npmDir,
+      packageName,
+      generationKey: [packageName, "1.2.3", `${packageName}@1.2.3`, "sha512-test", "abc123"].join(
+        "\n",
+      ),
+    });
+    const activeGenerationProjectRoot = resolvePluginNpmGenerationProjectDir({
       npmDir,
       packageName,
       generationKey: [
         packageName,
-        "1.2.3",
-        `${packageName}@1.2.3`,
-        "sha512-plugin-test",
-        "pluginshasum",
+        "2.0.0",
+        `${packageName}@2.0.0`,
+        "sha512-active",
+        "active123",
       ].join("\n"),
     });
     const legacyPackageDir = path.join(
@@ -2907,6 +2914,11 @@ describe("installPluginFromNpmSpec", () => {
       "node_modules",
       ...packageName.split("/"),
     );
+    const activeGenerationPackageDir = path.join(
+      activeGenerationProjectRoot,
+      "node_modules",
+      ...packageName.split("/"),
+    );
     for (const packageDir of [legacyPackageDir, generationPackageDir]) {
       fs.mkdirSync(packageDir, { recursive: true });
       await markRetainedManagedNpmInstall({
@@ -2916,6 +2928,7 @@ describe("installPluginFromNpmSpec", () => {
         reason: "test-retained-generation",
       });
     }
+    fs.mkdirSync(activeGenerationPackageDir, { recursive: true });
     const { scriptPath, logPath } = writeInstallOnlyBlockingPolicyScript(root);
     mockNpmViewMetadata({
       name: packageName,
diff --git a/src/plugins/install.ts b/src/plugins/install.ts
index 24d026859c0..5cb315a5687 100644
--- a/src/plugins/install.ts
+++ b/src/plugins/install.ts
@@ -1149,7 +1149,7 @@ function resolveManagedNpmInstallRoot(params: {
   });
   const npmRoot = resolveManagedNpmRootForInstall(params);
   const installRoot = resolveManagedNpmRootPackageDir(npmRoot, params.packageName);
-  if (!params.useGeneration || !hasRetainedManagedNpmInstallMarker(installRoot)) {
+  if (!hasRetainedManagedNpmInstallMarker(installRoot)) {
     return npmRoot;
   }
   // Never mutate a retained tree: an older process may still hold lazy imports
@@ -1206,6 +1206,7 @@ async function resolveManagedNpmGenerationUseForInstall(params: {
   npmBaseDir: string;
   packageName: string;
   requestedMode: "install" | "update";
+  npmResolution?: NpmSpecResolution;
 }): Promise<"none" | "update" | "retained-install"> {
   const packageDirs = await listManagedNpmPackageDirsForPackage({
     runtime: params.runtime,
@@ -1218,6 +1219,20 @@ async function resolveManagedNpmGenerationUseForInstall(params: {
   if (packageDirs.length > 0 && !hasNonRetainedPackageDir) {
     return "retained-install";
   }
+  const generationUse =
+    params.requestedMode === "update" && hasNonRetainedPackageDir ? "update" : "none";
+  if (params.npmResolution) {
+    const candidateRoot = resolveManagedNpmRootForInstall({
+      npmBaseDir: params.npmBaseDir,
+      packageName: params.packageName,
+      npmResolution: params.npmResolution,
+      useGeneration: generationUse !== "none",
+    });
+    const candidatePackageDir = resolveManagedNpmRootPackageDir(candidateRoot, params.packageName);
+    if (hasRetainedManagedNpmInstallMarker(candidatePackageDir)) {
+      return "retained-install";
+    }
+  }
   if (params.requestedMode === "update") {
     return hasNonRetainedPackageDir ? "update" : "none";
   }
@@ -1332,6 +1347,7 @@ async function installPluginFromManagedNpmRoot(
     npmBaseDir,
     packageName: params.packageName,
     requestedMode: mode,
+    npmResolution: params.npmResolution,
   });
   const npmRoot = resolveManagedNpmInstallRoot({
     npmBaseDir,
@@ -3093,6 +3109,7 @@ export async function installPluginFromNpmSpec(
     npmBaseDir,
     packageName: parsedSpec.name,
     requestedMode: mode,
+    npmResolution,
   });
   const npmRoot = resolveManagedNpmRootForInstall({
     npmBaseDir,
@@ -3243,6 +3260,7 @@ export async function installPluginFromNpmPackArchive(
     npmBaseDir,
     packageName,
     requestedMode: mode,
+    npmResolution,
   });
   const npmProjectRoot = resolveManagedNpmRootForInstall({
     npmBaseDir,