Liability Deductible vs. Self-Insured Retention (SIR)

A deductible reduces the limit but an SIR does not

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Liability deductibles and self-insured retentions are often used in commercial casualty insurance. Both are types of self-insurance. They enable policyholders to retain some of the risk of losses in exchange for a lower premium. While they serve similar purposes, liability deductibles and self-insured retentions (SIRs) are not the same thing. A key difference between them is that a deductible reduces the limit of insurance while an SIR does not.

What’s the Difference Between a Liability Deductible and a Self-Insured Retention?

  Liability Deductible  Self-Insured Retention 
Purpose  The policyholder pays a smaller premium but also assumes more risk.  The policyholder pays a smaller premium, but also assumes more risk and gives the insured control over payments for damages (and sometimes defense costs) that fall within the SIR. 
Effect on Limit  Limit is usually reduced by the deductible amount  Usually none—the entire limit is available after the SIR has been satisfied. 
Defense Costs  Generally, small deductibles include damages but not defense costs. The insurer pays all costs related to defense. Large deductibles may apply to both damages and defense costs.  SIRs usually apply to both damages and defense expenses. 
Claims Management  The insurer generally pays claims that fall within the deductible. In some cases, the insurer may permit the insured to pay small claims.  May allow insured to manage costs for both damages and defense. 

Purpose of Liability Deductibles and Self-Insured Retentions

Liability deductibles and SIRs allow policyholders to reduce their premium in exchange for assuming some risk of losses. The insured agrees to pay a specified portion of each loss and the insurer pays the rest. A deductible or SIR may be built into a policy or added via an endorsement. An insurer may require one or the other if the insured has a history of losses or if their business is in a loss-prone industry.

A policyholder may request a deductible or SIR as a way to reduce the cost of insurance and manage some of their claims.

Deductibles are often used on general liability, auto liability, and workers' compensation policies. SIRs are automatically included in many errors and omissions (professional liability) and commercial umbrella policies. 

The deductibles and SIRs found in liability policies purchased by small businesses are relatively small, such as $500, $1,500, or $5,000. Those found in policies purchased by big companies vary widely, from $1,000 to $100,000 or more. When a policy includes a deductible and a loss occurs, the insurer typically pays the entire amount of the claim and then bills the insured for the deductible amount. If a policy includes an SIR, the insurer pays nothing until the insured has satisfied the SIR amount in full.

Effect on Limit of Insurance

A major difference between a deductible and an SIR is how they affect the limit of insurance. When a liability policy covers a claim that’s subject to a deductible, the insurer pays the amount of the loss (up to the policy limit) minus the deductible, which is paid by the insured. If a policy includes an SIR, the insurer will pay up to the limit of insurance once the SIR has been satisfied. The SIR is not deducted from the limit. The following examples demonstrate how deductibles and SIRs work.

Let’s say Harry’s Hauling Service buys a commercial auto policy that has a liability limit of $50,000, the minimum required limit in his state. Because Harry’s Hauling has a history of small property damage losses, his auto policy includes a $2,500 deductible on each property damage claim. One day, an employee of Harry’s is driving a company truck when the brakes fail and the truck crashes into a house, causing $52,500 in property damage. Harry’s auto policy pays $47,500 for the loss ($50,000 limit minus the $2,500 deductible). Harry must pay the $2,500 deductible plus the remaining $2,500 of the claim amount. His total out-of-pocket cost is $5,000.

Now suppose that Harry’s auto policy includes a $2,500 SIR rather than a deductible. Harry pays the $2,500 SIR and his insurer pays the full $50,000 policy limit. Harry’s out-of-pocket cost is $2,500 (for the SIR).

When a policy includes a large deductible, the insurer may require the insured to produce a letter of credit or other form of collateral as proof that the insured has the financial wherewithal to pay claims that fall within the deductible.

Who Pays For Defense Costs?

The deductibles found in liability policies sold to small businesses generally only apply to damages. They don’t usually include defense costs. Large deductibles found in policies sold to big companies may apply to both damages and defense costs. With an SIR, the insured is responsible for all costs—damages and defense—until the loss exceeds the SIR.

Claims Management

When a policy includes a deductible, the insurer usually manages all claim payments. When a policy contains an SIR, the insured makes payments directly to claimants for damages that fall within the SIR. If the SIR applies to defense costs as well as damages, the insured manages damages and defense costs until the SIR is satisfied.

Frequently Asked Questions (FAQs)

Is a retention the same as a deductible?

No, they are not the same thing. A key difference is that a deductible reduces the limit of insurance but an SIR does not. If a policy includes a deductible and a loss exceeds the limit, the insurer will pay the limit of insurance minus the deductible. If a policy includes an SIR and a loss exceeds the limit, the insurer will pay the full limit of insurance once the insured has paid the SIR.

How do liability deductibles work?

The deductibles found in liability policies purchased by small businesses are usually relatively small, such as $1,000 or $5,000, and apply to damages only. They don’t normally apply to defense costs. When a loss happens and it’s covered by the policy, the insurer typically pays the entire claim amount and then bills the insured for the deductible amount.

Is a retention the same thing as excess insurance?

No. An SIR is a dollar amount stated in a liability policy that the insured must pay before the policy will respond. Depending on the policy, the SIR may apply to damages only or to damages and defense costs. Excess insurance provides additional limits above those afforded by the primary insurance policy. If damages use up the limits in the primary policy, the excess policy will pay the remaining amount of the loss, subject to the limit in the excess policy.

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