The Rise Of Sirs In Insurance: A New Trend?

Self-insured retention (SIR) is a self-insurance mechanism used by businesses to manage their insurance costs. It is a specific dollar amount in a liability insurance policy that the insured must pay out before the insurance company starts to handle and pay claims. SIRs are becoming a popular insurance option as they allow businesses to retain more risk and control over their insurance policies, resulting in reduced premiums and increased cash flow. Businesses with solid paperwork controls and risk management are well-suited to benefit from SIRs. However, it's important to note that SIRs also come with increased management and financial responsibilities, making them more suitable for mid-size and large employers who can cover significant losses with cash on hand.

SIRs and their differences from deductibles

SIRs, or self-insured retentions, and deductibles are two different mechanisms designed to keep insurance premiums down. They are similar in that they both impose a specific layer of risk onto the insured, but they differ in several key ways. This article will explore these differences in detail, providing a comprehensive understanding of SIRs and deductibles and how they compare.

Insurer Responsibilities in the Event of a Loss

One of the most significant differences between SIRs and deductibles is the role of the insurer in the event of a claim. With an SIR, the insurer typically has no involvement until the claim exceeds the SIR limit, and the insured is responsible for paying all expenses associated with defending the claim. On the other hand, under a deductible, the insurer pays every loss (up to the maximum limit of liability) and is then reimbursed by the insured for the amount of the deductible. In practice, for small losses, the insured may simply pay the amount to avoid the "dollar-trading" problem.

Collateral Requirements

Collateral requirements refer to the need for the insured to provide some form of guarantee, such as a letter of credit, to cover expected losses within the deductible. In the case of SIRs, there is generally no collateral requirement because the insurer has no responsibility to pay losses until the SIR limit is reached. However, for large deductibles, collateral is often required to assure the insurer that the insured can cover any potential losses.

Defense Costs

Defense costs refer to the expenses associated with defending a claim. With small deductibles, these costs are typically included as supplementary payments that do not reduce the policy limit. For large deductibles, defense costs usually do erode the deductible amount, although this is subject to negotiation. Under an SIR, the insured is responsible for all defense costs until the loss exceeds the SIR limit, and the SIR amount is not reduced.

Certificates of Insurance

Certificates of insurance are documents that outline the details of an insurance policy. In the case of a deductible, the insurer is ultimately responsible for paying losses, so the existence of a deductible may not need to be disclosed on the certificate. In contrast, SIRs must be disclosed on insurance certificates because the insurer has no obligation to pay claims until the SIR is exhausted. Some entities, such as banks, often require knowledge of any deductibles or SIRs regardless of disclosure requirements.

Limits Erosion

Limits erosion refers to how the SIR or deductible affects the total insurance limit. With an SIR, the annual aggregate limit is typically not affected by the SIR amount. For example, if the aggregate SIR is $1 million and the total policy limit is $10 million, the insured would still have $10 million of coverage above the $1 million SIR. In contrast, with a deductible, the annual aggregate limit is usually reduced by the deductible amount. Using the same example, a $10 million policy limit with a $1 million deductible would result in only $9 million of available coverage from the insurer, with the insured responsible for the remaining $1 million.

Insurer responsibilities in the event of a loss

Self-insured retention (SIR) is a self-insurance mechanism used by some organisations to manage their insurance costs. Under a liability insurance policy with an SIR provision, the business must cover a set dollar amount before the insurance company begins to pay out claims.

In the event of a loss, the insurer's responsibilities differ depending on whether the insurance policy includes an SIR or a deductible. Here are the key insurer responsibilities under each type of provision:

Insurer Responsibilities with an SIR Provision:

• The insurer is generally not involved in losses that do not exceed the SIR amount, also known as the attachment point.
• The insurer may require notification when a claim is reserved for an amount that reaches or comes close to the attachment point.
• Once the SIR limit is exhausted, the insurer steps in and starts paying claims. The insured is responsible for covering the SIR amount and managing claims below that threshold.
• There is no collateral requirement with an SIR provision. The insurer has no responsibility to pay until the SIR is exhausted, so there is no need for a letter of credit or other collateral.
• The SIR amount does not typically erode the total liability limits of the insurance policy. For example, a $1 million policy with a $100,000 SIR would still have $1 million in coverage once the SIR is satisfied.
• Within the SIR limits, the insured usually controls the defence of claims and has more flexibility in managing smaller claims.

Insurer Responsibilities with a Deductible Provision:

• The insurer pays every loss up to the maximum limit of liability and is then reimbursed by the insured for amounts up to the deductible.
• Small losses are often paid by the insured to avoid the "dollar-trading" problem, where the insurer pays and then seeks reimbursement for small amounts.
• In situations where the insured cannot pay a loss, the insurer may be obligated to step in and pay. This typically requires collateral, such as a letter of credit or other acceptable forms of collateral, to cover expected losses within the deductible.
• The annual aggregate limit is usually eroded by the deductible amount, reducing the total amount available from the insurer.
• The insurer manages claims, even smaller ones below the deductible amount, and is immediately involved in any claims.

In summary, the key difference in insurer responsibilities is that with an SIR provision, the insurer remains uninvolved until the SIR limit is reached, whereas with a deductible provision, the insurer pays losses upfront and seeks reimbursement from the insured.

Collateral requirements

In the context of SIR provisions, there is no collateral requirement. The insurer has no responsibility to pay out until the SIR limit is reached. This means that the insured party must cover all expenses associated with defending and settling claims until the specified SIR amount is exceeded. At that point, the insurer assumes responsibility for subsequent claims.

On the other hand, deductible-based coverage or policies typically do have collateral requirements. Deductibles are controlled by the insurance carrier, meaning they handle all claims from the outset. In this scenario, if the insured cannot pay a loss, the insurer is obliged to step in. To mitigate this credit risk, insurers usually require a letter of credit or some other form of collateral to cover expected losses within the deductible amount.

The absence of collateral requirements in SIR provisions is a significant advantage for businesses. Collateral requirements can be substantial, often amounting to multiples of the potential aggregate deductible cost for the year. By contrast, SIRs offer businesses greater financial flexibility and reduced upfront costs since no collateral is needed.

However, it's worth noting that SIRs also come with increased financial responsibility and management responsibilities. Businesses must be prepared to handle claims and have sufficient funds to cover the SIR amount before the insurer's involvement.

Defence costs

With SIRs, the insured party is responsible for covering all defence and/or indemnity expenses associated with a claim until the loss exceeds the specified SIR amount. This means that the insured assumes full responsibility for defending claims and bearing the associated costs until the SIR limit is reached. At that point, the insurer becomes responsible for any additional defence and indemnity payments covered by the policy. In other words, the defence costs do not erode the SIR amount, and the insured must pay these expenses independently.

On the other hand, with deductible-based coverage, the insurer typically assumes responsibility for defence costs. The insurer is responsible for defending claims and pays the associated costs, regardless of the amount of the deductible, as long as there is potential coverage under the policy. The insurer then seeks reimbursement from the insured for the deductible amount.

It's worth noting that in the case of small deductibles (less than $100,000), defence costs are often included as supplementary payments that don't affect the policy limit. However, with large deductibles, defence costs usually do erode the deductible amount, but this is subject to negotiation between the insurer and the insured.

The handling of defence costs is an important consideration when choosing between SIRs and deductibles. SIRs offer more control to the insured over the defence process but also place the financial burden of defence costs on them until the SIR limit is reached. Deductible-based coverage, on the other hand, provides relief from defence costs but may result in higher premiums or collateral requirements.

Certificates of insurance

A certificate of insurance (COI) is a document issued by an insurance company or broker that verifies the existence of an insurance policy. It is a summary of the key aspects and conditions of the policy, such as the policyholder's name, the policy's effective date, the type of coverage, and policy limits. COIs are commonly used in business insurance and auto insurance, where they are known as auto ID cards.

The purpose of a COI is to provide legal proof that an individual or business has adequate insurance coverage. For example, a business owner may be required to provide a COI to a client to ensure they have sufficient insurance to cover any potential issues that may arise during a project. Similarly, a car owner should keep their auto ID card readily available in their vehicle in case of an accident or police stop.

When obtaining a COI, it is important to validate the information it contains. This includes confirming that the name of the insured matches the person or company you are contracting with, the policy is currently in effect and will not expire before the completion of your project, all relevant coverages are listed with sufficient amounts, and the issuing insurer is legitimate.

While a COI provides a convenient summary of an insurance policy, it is not a guarantee of insurance. It only reflects the policy's status as of the date of issuance. Therefore, it is important to update the COI periodically to ensure that the insurance coverage is still valid.

In the context of self-insured retention (SIR), a COI is particularly relevant. SIR is a mechanism where the insured party is responsible for paying claims up to a certain limit, after which the insurance company takes over. In the case of SIR, the COI must disclose the existence of the SIR, as the insurer has no responsibility to pay claims until that limit is reached.

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