Many liability insurance policies incorporate a provision under which the insured retains a portion of the risk and provisions that establish the precise point at which the insurer’s defense and indemnity obligations arise. Common forms of significant risk retention are large deductibles, matching deductibles, and self-insured retentions (SIRs). These terms are often used interchangeably. While they share certain similarities, key differences exist. The distinctions between large deductibles and SIRs present themselves in connection with a variety of issues: the duty to defend, erosion of the insured’s retention by defense costs, “other insurance,” and allocation.
Understanding the differences and similarities paves the way toward the efficient handling of claims under policies subject to these provisions and defines the insurer-insured relationship under policies subject to these risk management and retention mechanisms.