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When a commercial policyholder assesses its risks in protecting against third-party claims, it will often determme that it is not financially advantageous or necessary for it to purchase liability insurance in an amount large enough to cover its entire potential exposure. It may elect to retam some portion of the risk and "self-insure" for a fixed dollar amount, purchasing liability insurance that attaches only above that amount. The amount of the exposure retained by the policyholder and not covered by the purchased insurance policy may be a "deductible" or a "self-insured retention" ("SIR"), also referred to as the "retained limit."
This article discusses the differences between a "deductible" and a "SIR" and considers why policyholders may choose one instead of the other, even if the dollar amount may be the same. Next, the article looks at whether an SIR may be satisfied by "other insurance" that provides coverage to the policyholder, either as the named insured or as an additional insured. Finally, the article addresses how a deductible may be satisfied and whether defense costs may erode the SIR.
The difference between an SIR and a deductible
An SIR is not a deductible. A deductible is that portion of the damages which the policyholder must pay before the policy's indemnity coverage attaches. Unless otherwise agreed,1 a deductible, regardless of amount, does not pertain to defense costs; even when the policy contains a deductible, the insurer must pay the defense costs if there is a potentially covered claim. The trade-off is that the insurer gets to control the investigation of the claim and defense of the suit, including the selection of defense counsel.
However, in those cases in which indemnity is owed, the amount of the deductible will be subtracted from the policy limits, thereby reducmg the available coverage.2 When the coverage is written above an SIR, the insured generally assumes responsibility for handling the claims and paying the defense costs. Once the retention has been satisfied, the full insurance policy limits will be available to pay a judgment or settlement. A policy may contain both, with a deductible to be satisfied after exhaustion of an SIR3 or, m a tower of coverage, the primary policy may have a deductible while one of the excess...