SIR or Deductible, What’s the Difference?
Deductibles and Self Insured Retentions (SIR’s) are mechanisms which require the insured to bare a portion of a loss otherwise covered by an insurance policy. Although these two mechanisms are economically similar, they differ in significant respects and should not be used interchangeably. A complete understanding of the ways in which these mechanisms differ and their respective advantages is of vital concern in underwriting and handling claims.
Deductibles & SIR’s, What are They?
What is a Deductible?
A ‘deductible’ refers to that portion of a loss for which the insured is responsible. Often, it is a specific sum that the insured must pay before the insurer owes its duty to indemnify the insured for a covered loss. The amount of the deductible, if any, will ordinarily be set forth on the declarations page or in an endorsement to the policy.
What is a Self-Insured-Retention?
A ‘self insured retention’ usually refers to a specific sum or a percentage of loss that is the insured’s responsibility and is not covered under the policy. The retention usually refers to a portion of the loss the insured itself must pay that is not insured under any other insurance policy
Issues in Defense
Assumption and Control of the Insured’s Defense
A policy with a deductible provision requires an insurer to investigate each claim and comply with the California Fair Claims Act. If a claim is potentially covered by the policy, the insurer is required to promptly assume the insured’s defense. The insurer retains control of the defense.
The insured is responsible for the administration of claims within the SIR, including provision of a defense. Therefore, the insured controls its own defense for all claims within the SIR. Until the SIR has been satisfied by the insured, the insurer has no obligation to provide or pay for the insured’s defense. An issue may arise concerning control of the defense when a claim’s exposure may exceed the SIR, triggering the policy over the SIR. If the insurer is worried that the claim may be mishandled by the insured, the insurer is free to associate its own defense counsel to monitor the defense. However, the insured will retain control over the defense and settlement within the SIR. More than likely, the insurer would not be permitted to challenge the insured’s decisions if they were made in good faith.
Payment of Defense Costs
Unless the policy otherwise provides (e.g. burning limits’ policy), the deductible relates to the damages for which the insured is indemnified, not to defense costs. The insurer is fully responsible for defense costs regardless of the amount of the deductible as long as there is a potential for coverage under the policy.
Until the insured becomes legally obligated for a loss in excess of the SIR, the insured must pay its own defense costs. In effect, the insurer under such a policy is providing excess insurance. -“As a self-insurer, an insured is solely liable for its defense costs attributable to the extent of its SIR, just as a primary insurer is responsible for defense expenses attributable to the extent of its coverage.” – City of Oxnard v. Twin City Fire Ins. Co. (1995).
Effect of the Insured’s Insolvency
An insured’s insolvency does not alter an insurer’s duty to defend and indemnify the insolvent insured. Although the insurer will be unable to collect its deductible from the insolvent insured, the insured’s insolvency will not reduce the insurer’s liability to those with insured claims.
An insured’s insolvency shall not obligate an insurer to “drop-down” absent some deficiency in policy language. Therefore, an insurer will continue to have no obligation to defend or pay a claim within that SIR.
Issues in Settlement
A policy with a deductible allows the insurer to defend and settle claims against the insured without the insured’s consent (unless the policy provides otherwise). This is true, even if, because of the deductible, the insured is ultimately obligated to pay the entire settlement (Ex: Insurer settles claim for $l0,000 where the policy contains a $25,000 per claim deductible).
Although there is no authority directly on point, it is doubtful that the insured owes any duty to protect the insurance company’s interest by settling claims within the limits of the self-insured retention. Further, an insurer cannot settle a claim within the SIR without the insured’s consent.
As noted in a case dealing with an excess insurer: “[A] policy providing for excess insurance coverage imposes no implied duty upon the insured to accept a settlement offer which would avoid exposing the insurer to liability. Moreover, such a duty cannot be predicated upon an insured’s implied covenant of good faith and fair dealing. If an excess carrier wishes to insulate itself from liability for an insured’s failure to accept what it deems to be a reasonable settlement offer, it may do so by appropriate language in the policy.”- Commercial Union Ins. Co. v. Safeway Stores, Inc. (1980).
Issues in Continuous Loss Claims
Deductible per Claim
Where the policy provides a deductible per claim, it is possible that separate claims may result in several deductibles, even though all claims arise out of the same “occurrence.” To achieve this result, the policy wording must be extremely clear and unambiguous.
Deductible per Occurrence
Where a policy provides a deductible per occurrence, all claims due to the same cause are considered a single loss to which a single deductible applies.- EOTT Energy Corp. v. Storebrand Int’l Ins. Co. (1996).
The following are examples of where a policy providing a deductible per occurrence, all claims due to the same cause are considered a single loss to which a single deductible applies.
- Insured sold defective plywood panels that were installed in 1,400 vehicles. Insured’s liability policy contained a $5,000 deductible ‘per occurrence.’ Only a single $5,000 deductible was chargeable to the insured despite the 1,400 separate injuries.- Whittaker Corp. v. Allianz Underwriters, Inc. (1992).
- Insured plaster manufacturer was sued for defective plaster walls in 28 different homes. Although multiple claimants were involved, the damage suffered by each resulted from the same cause (Insured’s failure to provide proper warnings that its plaster was not suitable for interior use). Hence, there was a single ‘occurrence’ subject to only one deductible.- Chemstar, Inc. v. Liberty Mut. Ins. Co. (9th Cir. 1994).
However, where a loss resulting from a single ‘occurrence’ continues throughout successive policy periods during which different insurers were on the risk, it is unclear whether a separate deductible is chargeable to the insured during each policy period (i.e. stacking of deductibles). Absent clear policy provisions, a court will look to the insured’s objectively reasonable expectations to determine whether more than one deductible will apply.
Advantages and Disadvantages
Self Insured Retentions
- No defense or indemnity duty until SIR satisfied, lowers claims handling expenses.
- If other insurance defending, no duty to participate until satisfaction of SIR by insured, defense expense incurred by other insurers in excess of SIR generally will not satisfy properly worded SIR. Particularly beneficial in loss case where all primaries are generally held to a duty to defend even if indemnity obligation will be limited.
- Ability to prohibit reinsurance of the SIR by the insured.
- Insured’s insolvency will generally not require insurer to “drop down,” even if no other insurance available. However, this can implicate complicated bankruptcy issues concerning discharge of the insured’s debts.
- No obligation to defend or indemnify additional insureds until insured satisfies SIR.
- Generally, no right to control defense until SIR satisfied. If there are problems with the defense the insured provides, no right to wrest control and assume defense.
- Insured has no obligation to accept settlement demand within SIR to protect against excess exposure, can choose to “gamble” with insurer’s money. Insurer has no right to settle within SIR without insured’s consent.
- Control of defense.
- Ability to settle matter within policy limits without insured’s consent.
- Must investigate claim and assume defense immediately.
- If insured insolvent, still required to assume defense and lose ability to recover deductible.
- If continuous loss, must contribute to defense with dollar one, even if other insurance available.
- Required to defend additional insureds at outset.