SIR – Save Premium Now, but Delay Compensation Later.
Insurance companies provide two components in their product, namely the coverage over the SIR and a “self-insured retention” or “SIR,” which enable insured individuals to handle claims as if they were self-insured.
In this article, we will discuss the fundamental concepts related to a SIR insurance policy, as the potential long-term consequences and responsibility might not justify the immediate cost savings.
What is a SIR Policy and how is it different?
A deductible is different from a SIR. One dollar is deducted from a claim against a covered SIR policy. The issue is who pays. The insured assumes no responsibility for the payment or defense of claims beyond the deductible.
The insured is responsible for paying the SIR and the cost of defense under the SIR policy. Depending on the insured’s limit, they take on the responsibility of defending and settling claims within the SIR as a way for the insurance company to cover claims beyond the SIR limit. While there may be a temporary reduction in premiums, the long-term risk of defending and paying claims is much higher.
Our Take on a SIR Policy
The insured must understand that the cost and expense of defense can occur many years later, after the premium savings are realized. These expenses can accumulate over time, and the longer-term exposure is to the defense costs and settlement expenses under the SIR provisions. An SIR policy can provide a significant reduction in insurance premiums as a short-term benefit.
For additional details regarding Self-Insured Retention Policies and effective risk management, the legal advisors at Garcia & Milas Law Firm are ready to offer you guidance. Please reach out to the Construction Law Group at Garcia & Milas Law Firm without delay.
The Biggest Problem with Self-Insured Retention
Depending on the level of financial commitment, there may be a critical increase in exposure to settlement expenses and costs, but there will also be savings in premiums. The number of cases that justify self-insurance and the understanding of the critical limit of damages are the largest single problems, regardless of whether the insured has a small (or large) exposure case.
How SIR Policies Differ
Most insurance companies have the discretion to choose whether to assume or “participate” in the defense of claims. Each insurance company creates their own insurance policies for SIR insurance, which are not based on an ISO form. The variations between these policies are notable. Typically, the models vary slightly from one company to another, although most companies that provide the product – SIR – adhere to a similar framework.
The insurance company will intervene to retain the loss when it falls below the SIR threshold. Essentially, to minimize its own risk, it may take action if the Company is dissatisfied with the defense strategy or perceives potential liability. Consequently, this may occur.
The Insurance Company’s Rights
Some insurance company policies state that the insured cannot seek recovery of defense costs from the stepping company, as it bears its own cost of defense in the event of unique problems that arise.
Additionally, there exist varying degrees of financial liability. However, the insured is responsible for paying the expenses up to the SIR limit, as imposed by others.
Why are ‘Step-In” Rights Exercised?
Most often, efforts are made to manage claims that are not well insured below the threshold SIR, in order to keep losses below the SIR threshold and ensure proper management of losses.
By entering into indemnity agreements with partners or subcontractors, companies can transfer the SIR exposure to others, while some companies may obtain additional insurance to protect against it.
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Raymond Garcia
Principal Attorney.
Raymond A. Garcia has been honored with the recognition of being included in the Connecticut Super Lawyers® list for Construction Litigation since 2006. He holds the position of the firm’s founding principal.
Mr. Garcia combines over 32 years of legal experience in franchise and construction commercial complex litigation with 10 years of hands-on experience in the construction industry.
Raymond has tried 50 construction cases. He has tried cases franchise to conclusion over 30 times before juries and courts. He has successfully conducted appeals before federal and state appellate courts. Mr. Garcia has extensively written and lectured on many subjects. Recently, he has authored articles about the application of the Due Process Clause of the United States Constitution, focusing on ethics and tactics in arbitrations and the use of punitive damages in arbitral awards.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how the discussed decisions or laws apply to their specific circumstances.