The key differences that should be thoroughly evaluated when deciding which works best for
your company.
With a deductible policy, the company pays for losses and then collects reimbursement from the policyholder afterward up to the amount of the deductible.
With self-insured retention in place, you’re required to make payments first, directly to the claimant (Come out of pocket). The insurance company only begins to make payments once the SIR is satisfied.
Under a SIR the insured is responsible for all expenses associated with defending claims until the SIR is exceeded. If your policy has a $75,000 SIR and one of your drivers has an accident that leads to a claim. You spend $35,000 in defense of the claim, (claims investigation, accident reconstruction, attorney fees, etc.) but in the end you are found liable, and damages are $50,000. The total cost for this claim including defense is $85,000. The insurer will only be obligated to pay $10,000 and only after you have paid the first $75,000. However, you also retain control of the defense, you decide when and how to respond. Policyholders have more room to maneuverer as they are not bound by California affirmative duty to settle.
California law, an insurance company has a duty “to make reasonable efforts”to settle lawsuits against its insured. ... 4th 310, 312.) California law imposes a duty to settle “to protect the insured from exposure to liability in excess of coverage.” (Murphy v. Allstate Ins. Co.)
Under a deductible policy, the defense costs are typically included.
Deductibles erode the limit of your insurance policy while SIRs don’t. In the above example, with an SIR in place, your policy provides a full $1,000,000 of coverage to be paid after you have satisfied the $75,000 SIR.
If that was a $75,00 deductible instead, your total policy limit is still $1,000,000 on paper, but it includes your $75,000 deductible. Essentially this means your insurer only provides $925,000 in real coverage.