SIR vs. Deductible – Who Cares?

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I don’t know who cares, but YOU should. Insurance seems to be a mystery to all but a few insurance professionals, but how many of us seek their advice, let alone take the time to understand it?

To begin with, remember that insurance is little more than credit enhancement. If ExxonMobil or the federal government is your landlord or tenant, it doesn’t need insurance to make you feel comfortable that it will be able to cover your claims or to stay in business after paying out a cool billion or two. Insurance is for schnooks like us. If we agree to rebuild our building, our tenants would be justified to insist we carry insurance so that our promise to rebuild would really mean something.

That having been said, let’s focus on how much money an insurance company will really ante up at the end of the day, and let’s restrict our discussion to liability insurance.

No one pays for insurance that will cover every single dollar of liability – that’s far too expensive. Every policy holder keeps some risk. That risk is either “kept” in the form of a deductable amount or as a Self-Insured Retention (SIR). These are not interchangeable terms.

When an insurance policy has a deductible, the insurance company will pay the entire claim and then seek repayment for the deductible from its insured. The amount of the deductible is immaterial. By the way, this means that a $1MM policy with a $50,000 deductible really provides only $950,000 of coverage though it will pay up to the face amount to a claimant.

In sharp contrast, where the policy has an SIR, the amount of which is called a “Retained Limit,” the insurance carrier doesn’t ever wake up, isn’t even obligated until its policy holder pays the Retained Limit. That’s a big difference. When it does, however, it will cover up to the face amount of the policy.

Try this. Assume there are two situations, one where there is a policy with a $100,000 deductible and the other where there is a policy with an SIR having the same $100,000 figure, but as a Retained Limit. Further, assume you are an additional insured under each hypothetical policy and there is a valid $75,000 claim for which you are liable and which falls under each policy’s coverage. Under the policy with the deductible, the carrier will pay the $75,000 and chase its insured for “contribution,” in essence seek “contribution.” And, you get a “dollar one” defense. Under a policy with an SIR, you will get a letter from the carrier saying “call us again after the policy holder has paid $100,000 out of its pocket.”

Essentially, an SIR policy is “excess” coverage. It picks up after the insured has paid the Retained Limit. It isn’t, however, “umbrella” coverage. While “umbrella” coverage is also “excess coverage,” picking up when the underlying policy is tapped out, “umbrella” coverage also fills in “gaps” in coverage where the underlying liability policy may not have afforded coverage at all. Yes, that’s another lesson: excess insurance coverage is not the same as “umbrella” coverage; it is less than “umbrella” coverage.

I’m not sure how interesting all of this is to readers. After all, even though leasing professionals, like all of those people who draft contracts of every sort, include paragraph after paragraph of precise-sounding insurance provisions in their documents, I have found that very few of them have spent any time understanding what they have said. Sadly, it seems to me that when it comes to insurance provisions, the rule seems to be “cut and paste from another document and then defend your insurance provision to the death.” To me, that’s sad. Too harsh? – tell me. If you’d like more insurance tidbits, tell me. Does anyone out there want to know about whether defense costs are inside or outside of policy limits? Or, does anyone want to know the difference between being an additional insured as contrasted to being an additional named insured? You might be surprised, because it isn’t intuitive. How about the differences between an aggregate limit policy, a per occurrence policy, and a per claim policy? Primary coverage? Non-contributing? Fess up, we’ve all written those words? Do you know what they mean? For sure, I’ll ruminate over insurance concepts again, but I’m not going to run to do so.

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Comments

  1. I, for one, would like the answers to all those questions and more. Seems like every time we have an insurance clause, I am learning all over again what the nuances are. For instance, lenders still continue to put in “all risk” policy language when in fact it’s “special risks” now. Ditto for the requirement that the carrier must provide notice of non-renewal to the lender and asking for language above and beyond the ACORD forms. Any additional insight into insurance would be greatly welcome!

  2. George Bernhardt says:

    Very good post, Ira. I deal with this a lot and always involve our Director of Risk Management when we start getting into the minutae of our policy. If necessary we bring in our insurance broker as well. These are all very important points and including them without a thorough understanding of what they mean can be dangerous.

    Susan also brings up a good point – make sure your language is up to date. It changes more frequently than most people realize.

  3. Ira, once again you have touched on and brought to the surface issues that I have been consulting on with my clients for years. Kudo’s to you for this article.
    You should however point out that anyone less than an additional insured is not an insured. ie being listed as a certificate holder invokes no right to coverage, it only is indicative that the Insured has the coverage specified on the ACORD Form or other document.

  4. Another great article. As an asset manager I have to know enough about insurance to make me dangerous, so I still rely on both legal and insurance professionals.

    However, let me add to the conversation concerning the management of insurance from a landlord’s business, no legal, perspective. Let me start by recommending that Ira continue the series so people understand the differences.

    The natural and man made disasters and there resulting claims will mean that insurance premiums will rise. The astute asset manager must weigh the increase in costs against the historic claims history and ask these two questions:
    – Are deductibles recoverable amounts under my leases?
    – If so, is there a fair trade off in increasing the deductible for a lower premium (in essence more self insurance)?

    But there is more. Are your tenants really insured? Leases typically state the type and amount of insurance a tenant is to carry. Many landlords don’t ask for proof of insurance and even if they do, many don’t do more than file them upon receipt. In my experience approximately 35% of certificates of Insurance (the proof of coverage) is incorrect in a material way against the lease requirements.

    For further information about an asset manager’s perspective on insurance management visit my blog at http://advance.beyond-the-building.com

    Peter D. Morris SCLS, SCSM, SCMD

  5. Great post and comments! When not starting with the client’s form, as the lawyer I make sure to get the risk manager’s sign off on the insuance sections, and I had a great mentor who made sure I understood the sections as well. But often, as we all know, the overriding business objectives in getting the store in or open aren’t going to slow down for long to get these right. Which brings me to this case which just came out today in Tennessee- it starts with a security guard and a shooting and ends with an “oral modification” with a request for a certificate of insurance and coverage for an additional insured’s own negligence. And a statement that all policies can define additional insured protection differently. http://www.tba2.org/tba_files/TCA/2011/lancasterm_092011.pdf
    I look forward to more ruminations on this topic.

  6. Good article. For many of your readers, this is actually an “interesting” subject (maybe we’re just in the wrong business!).

    An insurance primer on property/casualty coverage would be helpful.

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