What is a deductible vs. self-insured retention?
Short answer
A deductible is the amount you pay on each covered claim before the policy responds, while a self-insured retention is an amount you fund and administer yourself before the carrier steps in. A deductible usually leaves the carrier handling the defense from day one; an SIR often means you handle and pay for the claim until the retention is exhausted.
How a deductible works
The deductible is subtracted from what the carrier pays on a covered claim. With a $5,000 deductible, the carrier typically controls the defense and pays covered costs above that amount. Deductibles can apply per claim or per occurrence, and some forms apply them only to damages, not defense costs.
How a self-insured retention works
An SIR is an amount you retain and manage before the policy responds at all. You generally handle the claim, choose counsel within carrier guidelines, and pay costs until the retention is exhausted; the carrier then steps in above that point. Because the carrier's involvement starts later, SIRs usually appear on larger or specialty risks rather than small professional liability policies.
Key differences
- Who handles the claim: the carrier with a deductible, often you with an SIR
- When the carrier pays: immediately above the deductible, only after the retention is met with an SIR
- Whether defense erodes the retention: often yes with an SIR, not always with a deductible
- Effect on premium: both lower premium as they increase, but an SIR usually lowers it more
- Cash flow: an SIR requires you to fund claim costs up front and seek reimbursement later
Which one should a business choose
Small and mid-sized firms usually prefer a deductible because the carrier manages the claim and the firm's exposure is capped at a predictable amount. An SIR can make sense for larger organizations with a claims or risk management function, or where the carrier requires it for a specialty program. The decision should match the firm's cash reserves and appetite for handling litigation.
Questions to ask before choosing
- Does the deductible or retention apply to defense costs as well as damages?
- Is the amount per claim, per occurrence, or annual aggregate?
- Who selects defense counsel, and must the carrier approve them?
- Does the carrier have the right to consent to a settlement above the retention?
- Are claims expenses such as experts and investigation included in the retention?
Common questions
- Is a higher deductible always cheaper?
- Premium usually falls as the deductible rises, but the saving should be weighed against the cash you would need after a claim. A deductible larger than your available reserves turns a covered claim into a cash flow problem.
- Can a self-insured retention be used on professional liability?
- It can, most often on larger law firms, healthcare risks, and specialty programs. Many small professional liability policies use a straightforward deductible instead because the carrier wants to control claim handling.
- Does an SIR count as insurance for contract purposes?
- Sometimes not. Clients and lenders may require insurance with a deductible rather than a large retention, so review contract language before agreeing to an SIR-based program.
- Who pays defense costs under a deductible?
- Usually the carrier pays defense and then seeks the deductible from the insured, or applies the deductible to the total loss. The exact mechanic is set by the policy wording, so confirm it before binding.
Want to know what this means for your business?
Tell us what you do and we will explain which coverage responds, which wording to check, and what to ask a carrier. No obligation, and no coverage is bound by asking.
Professional Resource Insurance Agency, LLC. CA License #0G81238. Definitions are general information, not coverage advice for a specific policy.