What’s the Difference Between Deductibles and Self-Insured Retentions?

Insurance jargon can be hard to understand. It’s even more frustrating when you end up paying more for your insurance policy than you thought you would. Knowing some of the terms your insurance agent may use can definitely help. Here’s the difference between deductibles and self-insured retention.

The overall goal of an insurance policy is to make the policyholder whole in the event of a loss. As such, it is not the insurance company’s intent to pay for every nickel and dime claim submitted to them. Deductibles and retention are one of the ways insurance companies avoid paying nuisance claims.

What is a Deductible?

In property and casualty insurance, deductibles apply to first party overages. First party coverage means the policyholder is the recipient of the claim check. In insurance terms, the first party is the policyholder, the second party is the insurance company and the third party is anyone other than the policyholder or insurance company.

A deductible is the dollar amount you, the policyholder, must pay for each insurance claim.  For example, you purchase an auto policy with a $500 collision deductible and you get into an accident that causes $8,000 in damage to your vehicle. The insurance company will issue a claim check in the amount of $7,500. The remaining $500 is your responsibility.

The deductible is in place to prevent you from submitting small dings and dents that cost less than $500 to fix.

Self-Insured Retention

Self-insured retentions apply to liability policies (third-party coverage). Because liability policies do more than just pay liability claims, the self-insured retention applies to more than paying a portion of the actual claim.

In addition to paying the amount you become legally liable to pay as a result of a third-party claim, insurance companies also pay for the cost to defend the claim. Those costs can include attorney fees, court fees and more. With a self-insured retention, you are legally responsible for a portion of those ancillary costs.

An example of a common self-insured retention is the umbrella liability policy. Umbrella liability provides coverage over and above the underlying employer’s liability, auto liability and general liability coverages. Usually, the underlying policies have limits of at least $500,000. The umbrella policy provides coverage over and above the $500,000 limit (limits for underlying policies may vary).

There are occasions, however, when liability claims arise that are not covered by the underlying liability policies. In such cases, the umbrella policy drops down to cover the claim. Claims on which the umbrella liability drops down, self-insured retention applies. Typical self-insured retention for a commercial umbrella policy is $10,000. This means you are responsible for the first $10,000 in expenses, which include court costs and claim payment.  Once you have met the $10,000 self-insured retention requirement, the umbrella liability policy picks up the rest.

Deductible, Retention, and Premiums

There is an inverse relationship between the size of the deductible/self-insured retention and the policy premium. The higher the deductible or retention, the lower the premium.  Some policyholders opt for the higher deductible or retention in an attempt to save money on insurance premiums. While this is a nice cost-saving measure on the front end, it could prove costly in the long run.

If you do go for a high deductible or retention, it is wise to open an interest-bearing account with the necessary funds to cover the deductible if the need arises.  You should also be aware that deductibles and retentions apply on a per claim basis.  If you have several claims in one policy year, you must pay a separate deductible or meet the self-insured retention for each claim.