Auto Insurance Self-Insured Retention: Primary Or Excess?

Self-insured retention (SIR) is a self-insurance mechanism used by some organisations to manage their insurance costs. Under a liability insurance policy with a SIR provision, the insured must cover a set dollar amount before the insurance company begins to pay out claims. SIRs allow the insured to retain or manage more risk, as they are responsible for handling and paying claims as long as the claim is below the dollar amount specified in the policy.

Businesses use different types of risk transfer mechanisms, such as a policy deductible, and SIR is often used alongside various insurance policies, including auto liability policies.

Self-insured retention (SIR) vs deductible

Self-insured retention (SIR) and deductible are two terms often encountered when purchasing liability insurance. Although they are similar concepts, they are not interchangeable and differ in key ways.

Under a deductible policy, the insurer typically covers the losses immediately and collects reimbursement from the policyholder afterward. Conversely, with an SIR, the insured is responsible for making payments up to the SIR limit before the insurer pays anything toward the claim.

Level of Total Coverage

A deductible is included in the overall coverage, meaning the insurer is required to pay up to the specified amount minus the deductible. On the other hand, an SIR-based policy does not erode the coverage limits. The insurer is still responsible for paying up to the total coverage amount, excluding the SIR.

Defence Costs

With a deductible, defence costs are usually covered by the insurer. However, under an SIR, the insured is responsible for defence costs up to the SIR limit.

Collateral Requirements

Since a deductible policy requires the insurer to immediately provide coverage, they often require some form of collateral, such as a letter of credit, to ensure the insured can reimburse them. SIRs, on the other hand, generally do not require collateral because the insurer has no obligation to pay until the SIR is exhausted.

Reporting Requirements

With a deductible, the insurer is responsible for paying and defending all claims. In contrast, under an SIR, the insured assumes primary responsibility, and reporting requirements are typically imposed by the excess insurer.

The choice between an SIR and a deductible depends on your specific circumstances, needs, and goals. If immediate coverage in the event of a claim is a priority, a deductible may be preferable. On the other hand, if maximising coverage after out-of-pocket payments is more important, an SIR may be the better option.

SIR and premiums

An insurance premium is the amount of money an individual pays for an insurance policy. In the context of auto insurance, premiums are usually paid monthly, every six months, or annually. The amount of the premium is determined by a variety of factors, including the type of coverage, the area in which the insured lives, any claims filed in the past, and moral hazard and adverse selection.

One important factor that affects auto insurance premiums is the insured's driving record. The better the driving record, the lower the premium. Accidents, speeding tickets, and other traffic violations can increase the premium. Additionally, new drivers who have not yet established a driving history may also pay higher premiums.

The age and demographics of the insured also play a role in determining the premium. Teenagers and senior drivers are considered higher-risk, and therefore generally pay higher premiums than middle-aged drivers. The location of the insured can also impact the premium, with urban areas typically resulting in higher rates due to higher risks of collisions, theft, and vandalism.

The type of car driven is another factor. Expensive cars, particularly those with high repair or replacement costs, can lead to higher premiums. On the other hand, safety technology and anti-theft features can help lower the premium.

The mileage of the vehicle is also taken into account. Higher mileage and frequent long-distance driving can result in a higher premium due to an increased chance of accidents.

The coverage and deductible chosen by the insured also impact the premium. The more coverages and higher coverage limits selected, the higher the premium will be. Conversely, a higher deductible usually results in a lower premium.

It is worth noting that insurance companies use their own unique formulas to calculate premiums, and shopping around can help individuals find more affordable premium options.

SIR and small businesses

Self-insured retention (SIR) 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. This means that the insured party pays the defence and indemnity costs associated with a claim until the SIR limit is reached. After this, the insurer makes any additional payments for defence and indemnity that are covered by the policy.

SIR is an option for small businesses, often used alongside various insurance policies such as worker's compensation, general liability, and auto liability policies. It is a way for businesses to save money on insurance premiums. However, it is important to note that SIR requires the insured business to retain some risk and pay for claims out of pocket. This may not be a feasible option for small businesses that do not have the financial means to cover significant losses.

When considering SIR, small businesses should evaluate their liability risks and the potential cost of a single massive loss to determine the SIR limit. They will need to set up a fund to cover any losses within the SIR, keeping in mind the maximum amount of damages anticipated during the insurance period. Small businesses should also be aware of any state requirements and limitations regarding SIR. For example, businesses with auto liability insurance may need to own a particular number of vehicles to qualify for SIR.

While SIR can provide savings on insurance premiums and improved cash flow, it is essential for small businesses to carefully assess their ability to take on the financial risk associated with retaining some risk.

SIR and legal requirements

Self-insured retention (SIR) is a self-insurance mechanism used by some organisations to manage their insurance costs. It is a specific dollar amount in a liability insurance policy that the insured must pay before the insurance company begins to pay out claims. SIRs allow businesses to retain or manage more risk as they are responsible for handling and paying claims as long as the claim is below the dollar amount specified in the policy.

A good number of states have put in place specific requirements that businesses have to meet before they can use an SIR. For example, companies with auto liability insurance need to own a particular number of vehicles. State laws also expect businesses to prove that they are financially able to incur the set limits out of pocket. In some instances, the business may have to secure excess auto liability insurance to get approval for the SIR. The law also doesn’t allow business owners to use an SIR in place of an insurance policy.

While SIRs can save businesses money in a variety of ways, they also come with disadvantages. For example, there is an increased management responsibility as the business must dedicate time and resources to handling claims. There is also an increased financial responsibility as the insured must cover the SIR amount and the insurer doesn’t get involved until the SIR is reached.

SIR and umbrella policies

Self-insured retention (SIR) is a liability insurance policy provision that requires the insured to pay a specified dollar amount towards a claim before the insurer responds to the loss. SIRs are commonly set at $10,000 or $25,000, but can vary depending on the policy and insurer.

Under an SIR provision, the insured is responsible for paying defence and indemnity costs until the SIR limit is reached. Once this limit is reached, the insurer covers any additional payments for defence and indemnity that are covered by the policy. This differs from a deductible provision, where the insurer pays the defence and indemnity costs on the insured's behalf and then seeks reimbursement.

Umbrella policies are a type of supplemental or secondary insurance that serve two primary purposes: they increase the limits of underlying policies and fill in coverage gaps. Umbrella policies are often purchased to protect against liability lawsuits and typically have higher limits than standard insurance policies.

When an umbrella policy is used to extend the limits of an underlying policy, the underlying limits must usually be met before the umbrella policy provides coverage. In this case, the underlying policy should have limits equal to the umbrella policy's underlying limits.

However, when an umbrella policy is used to fill a coverage gap, there is typically no underlying policy to provide coverage. Instead, there is a self-insured retention, which is an amount that the insured must pay before the umbrella policy begins paying for a covered claim.

For example, if a business has a $400,000 claim that is not covered by a primary policy but is covered by an umbrella policy with a $10,000 SIR, the business would pay the SIR of $10,000, and the umbrella policy would cover the remaining $390,000.

Umbrella policies are a cost-effective way to obtain significant extra liability coverage and can provide peace of mind in the event of a financial liability that could deplete your assets.

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