If you own a business, then having sufficient insurance coverage is a must. Of course, one of the big choices with commercial insurance is whether to pay a high premium and get more comprehensive coverage, or pay a lower premium and take on more risk. While a higher level of coverage is always nice, some business owners have found that reducing regular insurance costs makes more sense for their company.
If you’re looking into commercial insurance (or if you’ve already taken out a policy), then odds are you’ve heard or read about two key terms: self-insured retention (often abbreviated as “SIR”) and deductible. While these terms refer to similar concepts, they are not interchangeable, so it’s good to understand how they differ from one another, and how each option would affect your business in the event of an insurance claim against you.
Let’s talk about each term in more detail below.
What is Self-Insured Retention?
One definition for self-insured retention is: “a specific dollar amount in a liability insurance policy. Before the insurance policy can take care of any damage, defense or loss, the insured needs to pay this clearly defined amount. Once the insured achieves the self-insured retention limit, the insurer can then take care of the remaining damage.”
Therefore, under an SIR-based policy you would have to pay the full amount up to a specified limit before insurance kicks in. For example, if your SIR policy limit is $25,000 and you’re defending against a claim worth $75,000, then you’d have to pay the full $25,000 amount before your insurer begins payment on the remaining $50,000.
What is a Deductible?
Most people are familiar with the concept of a deductible, or a specific amount of money that the insured must pay before their insurance coverage takes over. In terms of commercial insurance, however, a deductible may take effect after the insurer begins payment on the claim, in the form of reimbursement up to the deductible’s limit.
Self-Insured Retention vs. Deductible: How Are They Similar, and How Do They Differ?
Both SIR and deductibles are ways to keep your insurance premiums low. Insurers are more willing to charge reduced premiums on policies that carry a certain amount of risk for the insured; simply put, you won’t have to pay as much if you already have some “skin in the game.” Of course, if a claim is filed against you, then you’ll still have to pay up to the limits specified in your policy.
While self-insured retention and deductibles are similar in concept, they are very different in key details. These include the following:
1. When you have to pay
Self-insured retention requires that you, as the insured, make payments up to the SIR limit first, before your insurer makes any payments towards the claim. In contrast, a deductible policy often requires the insurer to cover your losses immediately, and then collect reimbursement from you afterward.
For example, if you have an SIR of $50,000 and are defending against a $200,000 claim, then you’ll have to pay the full $50,000 before your insurer begins payment on the remaining $150,000. With a deductible-based policy, however, your insurer will pay the full $200,000 amount first, and then require you to reimburse them the $50,000 deductible.
2. The level of total coverage
An SIR-based policy doesn’t “erode” your coverage limits. In other words, your insurance company doesn’t include your SIR limit as part of your overall coverage. In contrast, a deductible is included as part of your overall coverage, meaning that your insurer is required to pay up to the specified amount on your policy minus your deductible.
In the example given under point #1 above, let’s say that your total coverage is $500,000. With an SIR of $50,000, your insurer would still be required to pay up to $500,000 for any claim against your business. However, a deductible of $50,000 would be subtracted from your overall coverage limit, meaning that the insurance company would only be on the hook for up to $450,000.
3. Defense costs
With an SIR, you would be responsible for not only your losses up to the specified limit, but also your defense costs up to the limit. However, the defense costs are usually covered under a deductible policy. Therefore, $20,000 in defense costs would be paid by your insurer under a deductible-based policy, but would be paid by you under self-insured retention (assuming your SIR limit is over $20,000, and you haven’t already exceeded your SIR in losses).
Since insurance coverage under an SIR doesn’t really kick in until after you pay your share of the loss, insurers generally don’t require any collateral for this type of policy. However, since a deductible-based policy requires the insurer to immediately start coverage, it’s likely that they’ll need some form of collateral from you in order for the policy to take effect (for instance, a letter of credit).
Self-Insured Retention vs. Deductible: Which One is Best for Your Business?
The answer to that question really depends on your unique circumstances, needs, and goals. For example, if immediate coverage in the event of a claim is a high priority for you, then you’ll likely want to go with the deductible option. On the other hand, if you want the maximum amount of coverage after your required payments out-of-pocket, then self-insured retention may be the better choice.
Whatever the case may be, it’s always a good idea to seek advice and guidance from experienced insurance professionals, such as reputable insurance brokers. At Harris Insurance, our team combines years of industry experience with specialized expertise in key areas of commercial insurance – including SIR and deductible-based policies. We’ve served scores of clients in Las Vegas, and throughout Nevada, California, Arizona, and Utah.
If you’d like to learn more about how we can help you manage and minimize the risk associated with your business at the lowest possible cost, reach out to our team of experts today. We can guarantee that you won’t regret doing so.