Deborah Minkoff and Abby Sher of the Global Insurance Department authored chapter 1A: Self-Insured Retentions Versus Large or Matching Deductibles in the New Appleman on Insurance Law Library Edition, by LexisNexis .
Chapter 1A provides an overview of risk retention and risk transfer mechanisms that impact the extent to which an insurance policy will respond to a loss. Commonly referenced as large or high deductibles, matching deductibles, or self-insured retentions (“SIRs”), these mechanisms contemplate precise points of risk transfer to achieve commercial policyholders’ risk management goals.
Liability insurance policies issued to personal and commercial insureds incorporate a provision under which the insured retains a portion of the risk. Commercial insureds facing significant risks of liability, either high frequency/low severity risks or low frequency/high severity risks, seek to control their own defense and indemnity obligation up to a pre-determined exposure point. The labels for significant risk retention mechanisms often are used interchangeably, yet key differences exist. The distinctions between large deductibles and SIRs present themselves in a variety of issues: the duty to defend, erosion of the insured’s retention by defense costs, satisfaction of the deductible or retention, “other insurance,” and allocation.
Understanding the differences and similarities paves the way toward the efficient handling of claims under policies subject to these risk management mechanisms, defines the insurer-insured relationship, and assists both the insured and the insurer in developing appropriate claims management protocols.