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Posts|March 17, 2022

Deductibles vs. Retentions

By Paul Broussard
Risk Advisor CIC, SBCS, PWCA, cyRM

I often get asked the difference between a retention and a deductible, and the short answer I usually give is “A retention is like a deductible, but with some key differences…” and then I elaborate. Below is a list of some of the key differences:

Deductible

  • The Positives:
    • The Insurer will typically front the deductible then bill the insured for reimbursement of the deductible. If the insured cannot pay the deductible, the claimant is still made whole by the insurer, even if the insured goes insolvent.
    • Since the deductible is on the back end, an insured can earmark or save for the deductible amount which can help for liability claims which might take years to settle.
    • If a claim is potentially covered, the insurer has an immediate duty to defend the insured at the first dollar level.
  • The Negatives:
    • Since the deductible is to be reimbursed by the insured, financial underwriting of the insured may be required and collateral (Letter of Credit) may be necessary for higher deductibles.
    • The insurer retains control of the defense, including choice of defense counsel. The insurer is allowed to defend and settle claims made against the insured without the insured’s consent, even if the claim is settled within the deducible.
    • Deductibles typically erode the limit of liability. For example, a $1 million policy limit with a $100,000 deductible would leave the insurer responsible for the remaining $900,000.

Self-Insured Retention (SIR)

  • The Positives:
    • The insured controls its own defense for all claims within the SIR, including choice of defense counsel. The insurer can still assign its own defense counsel to monitor the defense. As such, the insurer will not typically question the insured’s decisions regarding defense.
    • Collateral is not typically required since the insured is responsible for the SIR.
    • SIR does not erode the limit of liability. For example, if the insured has a $1MM Liability Policy and a $100,000 retention, the insured pays the first $100,000 for defense/damages, but the insurer’s responsibility of a $1MM Limit still remains.
  • The Negatives:
    • SIRs are applicable to liability policies—not first party property insurance.
    • A SIR is the responsibility of the insured starting from dollar one of the claim. As such, the insurer does not get involved until the SIR is reached (but should still be notified), or until reserves pierce the SIR.
    • Typically, the insured’s insolvency does not obligate an insurer to drop down to pay the SIR. The Insurer has no obligation to defend or indemnify the Named Insured or any additional insureds until the SIR is satisfied.

If you have any insurance or risk management related questions, please reach out to our office.

Paul Broussard, CIC

pbroussard@cavignac.com

619-744-0577

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