Author, Sam Clayton, Vice President, Construction Group, Rancho Mesa Insurance Services, Inc.
Every business or non-profit that purchases a form of liability insurance has seen the term deductible or self-insured retention (SIR). While many know the difference between the two, many do not. Deductibles and SIRs, while quite different, are both designed to keep your premiums down. Insurers are willing to reduce the premium on policies, which have a deductible or SIR, because the insured assumes some of the risk. This however, is where the similarities end.
Below are the three key differences between self-insured retention and deductibles:
With a deductible, the insured notifies the insurer when there is a claim. The insurer provides immediate defense, pays for any losses incurred and then collects reimbursement from the policyholder after the claims is closed, up to the deductible amount. Under an SIR, the insured is still required to notify the insurer of any claim. The insured will immediately begin to make payments on that claim until the SIR is satisfied. At that point, the insurer will take over.
Deductibles erode the limit of your insurance policy, while SIR(s) do not. Let’s assume you have a standard $1 million policy limit with a $50,000 deductible. In the event of a loss, the insurer will be responsible for $950,000, since the insured is required to reimburse the insurer for the full deductible amount. Under the SIR, the insured is immediately responsible for the first $50,000 of any one claim, and the insurance company is responsible for the full $1 million limit.
Large deductibles often require that the insured provide a letter of credit or some other acceptable form of collateral to cover expected losses that occur within the deductible. With SIR(s), the insurer has no responsibility for paying losses until the SIR is exhausted; therefore, no collateral is required.
When reviewing your coverages and limits, if you see the terms ‘self-insured retention’ and/or ‘deductible’ please understand the terms may seem interchangeable, but there are major differences. Please contact Rancho Mesa at (619) 937-0164 with any further questions.