Academic journal article Defense Counsel Journal

SIRs and Deductibles - Evolving Policies and Their Impact on Carrier Duties

Academic journal article Defense Counsel Journal

SIRs and Deductibles - Evolving Policies and Their Impact on Carrier Duties

Article excerpt

EVEN as the global economic crisis begins to show signs of recovery, commercial insureds continue to look for ways to tighten their corporate belts, cut costs and boost profits. One of the areas where insureds are increasingly taking a second look to determine whether it is possible to reduce costs is their corporate risk management programs, including the insurance products they purchase. As a direct result of such cost-saving efforts, more and more commercial policies are being written with large self-insured retentions ("SIRs") and higher deductibles. As noted by the Wisconsin Supreme Court in a recent decision, as a growing numbers of insureds elect to control their insurance costs by purchasing policies with substantial SIRs and deductibles, a body of case law is beginning to emerge highlighting some of the issues that often accompany an insured's decision to manage its costs, and its exposure, in this way. '

This article addresses a number of issues that are implicated by an insured's decision to assume responsibility for a greater portion of its risk in the form of an insurance policy with a significant SIR or deductible, and the case law that impacts on these issues. First, this article examines the differences between SIRs and deductibles, including the advantages and disadvantages to a commercial insured of purchasing a policy with a significant SIR or deductible as part of its overall risk management and cost containment strategy. Second, this article addresses whether an insured with a large SIR has a duty to its excess insurer to settle claims within the SIR and whether it can be held liable if it fails to do so. Third, this article addresses whether an insurer has the right to settle a claim over the objection of an insured with a substantial SIR or deductible especially where the settlement would involve a substantial contribution by the insured with little or no contribution by the insurer. Fourth, this article addresses the obligations of an excess insurer when an insured is insolvent and is incapable of paying its SIR. Finally, this article addresses the coverage implications associated with the satisfaction of the SIR by insurers or other third parties to the insurance contract.

I. SIRs and Deductibles- What's the Difference?

In the current economic climate, first-dollar coverage has become a luxury that many commercial insureds can no longer afford. Although policies with large self-insured retentions and deductibles have always been available, they were frequently overlooked in the past when bottom lines were healthier and insurance premium costs were subject to less scrutiny. As more insureds assume greater responsibility for managing the risk of smaller claims while relying on traditional insurance products for catastrophic protection, more policies are being issued with significant SIRs and deductibles.

True "self-insurance" involves a pure risk retention approach under which a company elects to assume full responsibility for any losses that may arise and insures none of its potential liability with a third party.2 As such, a corporation that truly self insures must pay all judgments and settlements for all claims asserted against it, as well as the related loss adjustment expenses including defense costs. All other forms of self-insurance, including the strategic use of deductibles and SIRs as part of an overall risk management strategy, represent a departure from true selfinsurance.

SIRs and deductibles are similar in that both require the insured to bear financial responsibility for a portion of a loss and, in this regard, represent an exposure that is not covered by insurance. However, there are important differences in the way they operate, and it is a mistake to use these terms interchangeably as inexperienced insureds occasionally do. In Allianz Ins. Co. v. Guidant Corp., the Indiana Court of Appeals explained the distinction between a deductible and an SIR was recently explained by one appellate court in this way: "[a] policy with a deductible obliges the insurer to respond to a claim from dollar one (i. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.