At first blush, self-insured retention (SIR) policies may look like insurance policies with a large deductible. A business agrees to maintain its own insurance up to a certain limit. If the costs of a claim exceed that limit, they may trigger an insurance company’s responsibility.
However, the truth is somewhat more complicated. As the American Bar Association notes, businesses and insurance companies are likely to share the same interests up to the SIR limit. At that point, the business wants the insurance to accept extra costs. The insurance company wants to explore the contract carefully to see if it must, in fact, assume responsibility. In many cases, it will not.
SIR is not the same as a deductible
The first thing to acknowledge is that SIR and deductibles are different. They key difference is that, with a deductible, an insurer becomes liable for damages from the outset. However, the insurance can and will recoup the deductible from the business. With SIR, the insurance has no responsibility or obligation until a business faces a claim that exceeds the limits of its SIR.
The contract is key
Because business interests and insurance interests diverge when the costs of a claim may exceed the SIR, both sides need to understand how to identify those costs. Unfortunately, this often proves more difficult than either side expects.
The authors of a 2009 review of SIRs noted that there’s no standard SIR policy. The legal responsibilities each party holds may change from insurance company to insurance company and from business to business. Accordingly, both sides want to be sure they understand the contract. The best contracts will clarify expectations. When the contracts are unclear, tensions arise, and the sides may need to look at legal precedent for guidance.
Depending on the terms, a SIR policy may look more or less like a deductible. Businesses are more likely to interpret the policies as deductibles and should remain skeptical of their assumptions. Insurance carriers are more likely to interpret the policies as limitations on their liability and should understand how the courts have previously ruled on ambiguous language.
Tensions can rise between businesses and insurance carriers based on both the terms of the contract and the ways either side may choose to frame their actions. Some common examples include:
- Disputes about whether a business has exceeded its “per occurrence” costs. Businesses may claim an amount as a single occurrence that the insurance sees as resulting from multiple occurrences.
- Businesses that go bankrupt and still seek coverage for a claim may find the insurance company unwilling to pay. Whether or not the insurance must pay may depend on the terms of the SIR.
- Insurance companies often expect businesses to settle claims within the amount of their SIR if possible, but businesses may not need to settle. Many insurance companies write their policies to force the business to settle if it receives an offer within its SIR limit.
The best thing is to avoid disputes by making certain both sides clearly understand their responsibilities within the terms of the policy. However, that doesn’t always happen. Disputes do arise, and you want to make sure you understand the strength of your case in the context of legal precedent. Courts across the United States have offered contrary rulings on different issues related to SIRs.
Businesses and insurance providers both frequently have much to lose in these cases. That can make them quite heated. Accordingly, it’s important to make sure you gather all the relevant facts. You want to understand your rights and the legal precedents. Then, you want to decide the best course of action, whether that means settling part way or taking your case to court. Either way, preparation is key.