SIR – Save Premium Now, but Pay Losses Later
Insurance companies offer a product which allows an insured to manage claims against it as if it were self-insured. The two components of the product are a “self-insured retention” or “SIR” and the coverage over the SIR.
In this article, we will cover the basic principals pertaining to a SIR insurance policy and why the short-term premium savings, may not be worth the long-term risk and liability.
What is a SIR Policy and how is it different?
SIR is different than deductibles. A claim against a SIR policy is covered from dollar one. However, the issue is who pays. The idea is that with a deductible, the insured assumed no responsibility for the defense or payment of the claims, beyond the deductible.
With the SIR policy, the insured pays up to the SIR and the cost of defense. Depending on the limit of the insured, they assume the obligation to defend and settle claims within the SIR as the economic incentive of the insurance company to cover claims over the SIR limit. There may be a short-term savings of premium, but a long term exposure too far more expensive for defending and paying claims.
The Biggest Problem with Self-Insured Retention
The single largest problem is whether the insured has a large (or small enough) case exposure, not to just understand and limit damages but more critically project and manage the number of cases, to justify the self insured element. There will be a savings in premiums, but there will be a critical increase in exposure for cost and settlement expenses depending on the level of financial commitment to the SIR element.
How SIR Policies Differ
While most companies that offer the product – SIR – follow a similar model, usually the models differ from company to company in subtle ways. The differences are significant. Most insurance policies for SIR insurance are not on an ISO form and are drafted uniquely by each insurance company. In addition, most insurance companies retain the right to assume or “participate” in the defense of claims as a matter of their own discretion.
So, if the Company does not like the way a case is being defended or perceives exposure, it may step in to take steps to limit its own exposure. In other words, the insurance company will step in to keep the loss below the SIR threshold.
The Insurance Company’s Rights
The step in rights come with problems that are unique. Some policies say that the insurance company stepping in bears its own cost of defense and cannot seek recovery of defense cost from the insured.
However, others impose the cost on the insured up to the limit of the SIR. And with that, there are levels of expense exposure as well.
Why are ‘Step-In” Rights Exercised?
Most often step in rights are exercised to try to keep the loss below the SIR threshold or manage claims that are not being well managed by the insured, also to keep the losses below the SIR thresholds.
Some companies procure other insurance to cover the SIR exposure. While other companies will lay off the SIR exposure with indemnity agreements with partners or subcontractors.
Our Take on a SIR Policy
The short term benefit of an SIR policy can be a significant reduction in insurance premium. But, the longer term exposure is to the defense costs and settlement expenses under the SIR provisions. These expenses can mount up over time. And the insured has to understand that the cost and expense of defense can occur many years after the premium savings is realized.
For more information on Self-Insured Retention Policies and how to successfully manage your risk, the attorneys at Garcia & Milas Law Firm are available to provide you with legal counsel. Please contact the Construction Law Group at Garcia & Milas Law Firm today.
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Raymond A. Garcia is the founding principal of the firm. He has enjoyed the distinction of being named to the Connecticut Super Lawyers® list since 2006 for Construction Litigation.
Mr. Garcia combines 10 years of hands-on construction industry experience with more than 32 years of legal experience litigating complex commercial construction and franchise disputes.
Raymond has tried 50 construction cases to conclusion before courts and juries. He has tried to conclusion over 30 franchise cases. In addition, he has conducted successful appeals before state and federal appellate courts. Mr. Garcia has lectured and written extensively on many subjects. Most recently he authored articles about the application of the Due Process Clause of the United States Constitution to arbitral awards of punitive damages, use of chess clock arbitrations and mediation ethics and tactics.
This publication is for general information purposes only and is not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.