What Is A Self Insured Retention?

What Is A Self Insured Retention?

A self-insured retention is a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss. Thus, under a policy written with a self insured retention provision, the insured (rather than the insurer) would pay defense and/or indemnity costs associated with a claim until the self insured retention limit was reached. After that point, the insurer would make any additional payments for defense and indemnity that were covered by the policy.

What does insurance retention mean?

Insurance retention may sound like you are purchasing or “retaining” insurance but what you are actually doing is retaining or managing more of your risk. Insurance retention means that you, as an insured company, will be responsible for paying claims against you up to a certain dollar amount. For claims that go beyond that dollar amount, the insurance company handles the claims. 

In contrast, under a policy written with a deductible provision, the insurer would pay the defense and indemnity costs associated with a claim on the insured’s behalf and then seek reimbursement of the deductible payment from the insured. For example, assume that two policies are identical, except for the fact that Policy A is written with a $25,000 deductible, while Policy B contains a $25,000 self-insured retention. Also, assume that defense and indemnity payments for a given claim total $100,000. In the event of a claim under Policy A, the insurer would pay the $100,000 in defense and indemnity costs that were incurred. After the claim is concluded, the insurer will bill the insured for the $25,000 in payments made on the insured’s behalf. In the event of a claim under Policy B, the insured will pay the first $25,000 of defense/indemnity costs, after which, the insurer will make the additional $75,000 in defense and indemnity payments on the insured’s behalf.

Is self-insured retention the same as a deductible?

On the surface, self-insured retention and deductible seem similar as each of them requires the insured to assume some of the risk of loss they face. Premiums for self-insured retention policies and those with deductibles are also generally lower. But aside from that, the two are different ways of dealing with insurance claims. 

While both types of policies require the insured to pay a portion of the claim, under a policy with a self-insured retention provision, the insured company is basically responsible for paying for claims or handling claims however they see fit if those claims are below the dollar amount specified in the policy. This reduces their premiums and the number of claims they have to make to their insurer while giving them more control over how those claims are handled. 

In an insurance policy with a deductible, the insurance company handles all claims and then seeks reimbursement from the insured company for the deductible after the claim has been settled. 

What is self-insured retention on an umbrella policy?

An umbrella policy is a policy that’s purchased to extend or “increase” the limits of an underlying policy and to fill any gaps in the underlying policy’s coverage. 

When used to increase the limits of an underlying policy, an umbrella policy kicks in once the limits of that underlying policy have been reached. For example, if your company has a commercial general liability policy of $500,000 and a serious personal injury claim for a slip-and-fall accident against your company totaled over $600,000 because the person suffered head trauma, your umbrella policy would cover the remaining $100,000 (assuming that your umbrella policy has a limit of at least $100,000). 

Self-insured retention on an umbrella policy is used when the umbrella policy kicks in to cover gaps in the underlying policy. Using the above example, let’s say for the sake of argument that your CGL policy doesn’t cover slip-and-fall accidents (they do) and you purchased the umbrella policy to cover that gap in case of a slip-and-fall accident. Because your CGL policy will not respond to this claim, essentially there is no underlying policy. 

As discussed in question 2 above, self-insured retention is paid by the insured client before the insurance company gets involved and they will only do so if the claim is higher than the self-insured retention. So in a situation where an umbrella policy is used to fill a coverage gap, the self-insured retention basically acts as an underlying policy.  To finish our example, if the self-insured retention is $100,000, the insured company would pay that amount and the umbrella policy would cover the remaining $500,000.

How does someone become self-insured / How does self-insured retention work?

To become self-insured, speak to your broker! In a nutshell, self-insured retention requires the insured to create a fund that covers the self-insured limit and someone to handle those claims.

See also Deductible.

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