Deductibles vs. Self-Insured Retention
Deductibles and self-insured retentions (SIR) are commonly seen on many types of a liability insurance policies. While some view these terms as essentially being interchangeable due to their overall concept being similar, there are some key differences businesses should be aware of.
Both SIR and deductibles are used to keep premiums down. Insurers are willing to lower premiums on policies which have deductibles/SIRs in place because you, as the insured, have more skin in the game and will pay for a portion of your own losses. If you experience a covered loss and your policy contains either an SIR or deductible, the idea is that the insurer will pay for the loss up to policy limits. You’ll then still be required to provide a specified amount of payment.
To help differentiate SIR and deductibles, let’s look at an example. Let’s say that you have a liability policy in place with a $1,000,000 limit and you experience a $100,000 covered loss on a liability policy which contains a $50,000 SIR or deductible. In both cases, you'll end up paying $50,000 for this loss to satisfy the SIR/deductible and the insurer will pay the remaining $50,000. However, there are a few key differences to note depending on whether your policy contains a self-insured retention or a deductible:
1. With a deductible policy, the insurer pays for losses and then collects reimbursement from you afterward up to the amount of the deductible. With an SIR in place, you’re required to make payments first and the insurer only begins to make payments once the SIR is satisfied. In our example, a deductible policy would have the insurer cover the $100,000 loss and then collect payment of $50,000 from you afterward. With an SIR you’ll be forced to pay the first $50,000 of the loss before the policy will respond and cover the remaining $50,000.
2. Deductibles erode the limit of your insurance policy while SIRs don’t. In this example, with an SIR in place, your policy provides a full $1,000,000 of coverage to be paid after you've satisfied the $50,000 SIR. With a deductible, your total policy limit is still $1,000,000 but that includes your $50,000 deductible. Essentially this means your insurer only provides $950,000 in coverage once you’ve paid your deductible.
3. Under an SIR the insured is responsible for all expenses associated with defending claims until the SIR is exceeded. If your policy has a $50,000 SIR and you experience a $30,000 loss which also requires $15,000 in defense costs, you’re responsible for all payments totaling $45,000. Under a deductible policy, the defense costs are typically included.
4. Deductibles put an immediate burden of payment on the insurer. As they're required to provide payment on losses prior to the insured, policies with large deductibles can often require that the insured provide collateral in the form of a letter of credit to ensure they're capable of paying for their share of a loss. Under SIRs the insured is required to exceed the SIR prior to the insurer making any payments so no collateral is required.
The purpose of SIRs and deductibles are largely the same, but as you can see there are some critical differences.
Contact a member of our ‘A’ Team today if you have additional questions – we’re happy to answer!
ABOUT THE AUTHOR