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