Virtually all insurance policies contain either a “deductible” or a “self-insured retention.” Courts often use those terms interchangeably, but they are different, and the difference can be important.
According to a recent decision of the North Carolina Court of Appeals in N.C. Insurance Guaranty Associated v. Withers Field Management, LLC, COA No. 19-300 (November 5, 2019), a “deductible” is the portion of the loss for which the policyholder is responsible. In addition, if the policy has a deductible, the insurance company will be involved as soon as the claim is made, and the insurance company typically is required to provide legal defense from the outset. In contrast, a self-insured retention (“SIR”) is a specific amount of loss that is not covered by the policy, but instead must be borne by the policyholder before the insurance company will respond. An SIR serves as a “first insurance” by the policyholder itself, up to the dollar limit of the retained risk, at which point the coverage available under the policy is activated. Until the SIR amount is reached, the policyholder is responsible for its own legal defense.
Assume, for example, that the policyholder experiences a covered loss totaling $1.1 million, and the limit on the policy is $1 million, with a $100,000 deductible. In that scenario, the total coverage amount available to the policy holder would be $900,000 (the policy limit minus the deductible). The insurance company would typically pay its $1 million limit, then bill the policy holder for $100,000 (the deductible amount), so the net benefit to the policy holder is $900,000.
On the other hand, if a $1 million insurance policy includes a $100,000 SIR, rather than a deductible, the same loss would result in payment of $1 million (the policy holder would pay the first $100,000 due to the SIR, but the full limits would be available once the SIR was paid).
The policyholder who wants their insurance company to provide legal defense for the insurance claim from the outset may prefer a deductible, other things being equal. A self-insured retention does not provide for the defense of the insurance claim, unless otherwise provided for in the policy, until the SIR amount is exhausted.