by Carol Rucker

Created on: November 08, 2011   Last Updated: November 09, 2011

Self-insured retentions and deductibles are alike in some ways. Both require the insured to contribute to the cost of a covered claim. Deductibles are usually offered by both personal and commercial lines of insurance carriers. There are more differences than similarities however. Self-insured retention limits are usually only offered by commercial lines carriers. They are written primarily on liability coverages. If the insured is in a high risk business, a high self-insured retention limit may be a requirement for them to get insurance in the first place. Here are a few other things you may wish to know about the differences between self insured retentions and deductibles.

What is a deductible?

If you have insurance, you most likely know what a deductible is. Most auto, home and other personal lines policies list a deductible on the policy declarations page. It's a flat dollar amount, usually in round numbers such as 100 or 500 dollars. A deductible is the amount the insured must pay in the event of a claim. Deductibles apply primarily to first party claims.

For example, if the insured has an auto policy with a 100 dollar collision deductible, he would owe the first 100 dollars of any collision claim. If the collision damage to his car is less than 100 dollars, he would have no right to make a claim. Increasing the deductible amount is also one of the easy ways to lower a policy premium.

What is a self-insured retention limit?

When a business wants a little control over their premiums or an insurance company wants control over their claim exposure, they can write a policy with high a self-insured retention limit or SIR. It's usually in an amount far greater than a deductible. For example, a commercial insured may agree to retain the first 25,000 dollars of any covered "occurrence" under their liability coverage. The SIR works like the deductible in that no payment is owed on behalf of the insured if the claim does not exceed the stated limit. Unlike a deductible, an SIR may be written to include defense costs as part of the claim for the purpose of exhausting the self insured retention limit.

In theory an insured can't make a liability claim if the damages don't exceed the self insured retention limit. In reality, insurance companies want to be notified immediately in the event of any claim. Policy provisions require notification regardless of the estimated cost or self insured retention limit. Liability claims are notorious for spinning out of control, so most insurers want to be involved from day one.

Insurers may allow insureds with high self insured retention limits and a proven track record to handle their own self insured liability exposures. The insured would customarily hire a risk manager to handle such claims or contract with an independent claim agency. Some insurance companies handle an insured's self insured limit as an independent contractor.

Self insured retention or not, many insurance companies prefer to handle the claim themselves. That allows for greater control and consistency, just like a claim without a self insured retention. When the insurer administers the SIR, they pay the covered claim and a different insurance department bills the insured for their share. Some insurance companies assess a handling fee if they administer a claim within the insured's self insured retention limit.

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