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.