Insurance terms can be confusing. For example, do you understand the difference between a deductible and a self-insured retention (SIR)? A self-insured retention is the amount of damages and/or legal costs that the insured must pay, also known as a ‘retention,’ before the insurance carrier will pay on the insured’s behalf. The SIR does not reduce policy limits. For example, if a policy has a $1 million limit and a $100,000 SIR, the insured has $1 million limit available after retaining the $100,000 SIR.
How a deductible applies can depend on several factors. Generally speaking, the deductible is the amount deducted from the amount of damages paid out on behalf of your organization. Using the above example, if the $100,000 were a deductible, the amount that would be available for the payment of damages would be $900,000. When an organization carries a deductible, the insurer settles the claim, and then charges the deductible back to the insured.
With a deductible, the carrier generally handles the claim on your behalf. With an SIR, the insured handles the claim and bears the expense until the SIR amount has been paid. Defense cost may or may not erode the SIR.
When should an organization consider taking an SIR rather than a deductible? “An SIR could be appropriate for a risk that has frequent but small losses,” according to Dave Riggs, a risk and insurance specialist with Asplundh Tree Expert Company. “The SIR would let the organization manage those small claims while preserving the insurance for catastrophic losses. With the SIR, the claims would not appear on the insurance loss run, negatively impacting a company’s ability to obtain insurance.
“In a prior position, I was with a property management company that had some malls in its portfolio. We were able to use a small SIR of $500 to pay slip & falls. No bodily injury [settlements] were allowed, but we used it to replace glasses or other items that were broken.” This tactic can go “a long way to quickly resolve a claim, before lawyers would be involved,” according to Riggs. He recommends a company has proper procedures in place and obtains proper documentation, including a release of liability. An internal loss run should be maintained, as well.
Before implementing either an SIR, a company should have appropriate safety measures in place to reduce the frequency and severity. The organization should also have the appropriate claims management software, whether proprietary or an industry database, before it proceeds.
In short, a deductible reduces the policy amount whereas the SIR does not. These are some guidelines; however, one must always look at the policy language to ensure how a deductible or SIR will apply. Your agent or broker can help and assist you.