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Self-insured retention (SIR) is a provision in a liability policy that states a specific dollar amount in the insurance contract. In the event of a covered claim, this amount must be paid first by the insured, prior to the insurance company payout. Once a policy’s SIR limit has been met, the insurance company will respond by covering expenses associated with the loss as outlined in the contract. The SIR provision can be found in many different types of liability insurance policies, such as crime, cyber, errors and omissions, and directors and officers (D&O).
SIR in a D&O Liability Insurance Policy
The SIR provision in a D&O policy is similar to a deductible in that it acts as a cost-control tool, requiring the insured to take on (retain) a portion of the risk.
For example, a D&O policy might have $5 million in liability coverage and be subject to a $150,000 per-claim SIR. Under the SIR provision, the insured will be responsible for paying all defense and/or indemnity expenses associated with a claim until the provision has been reached.
The amount of the SIR in a particular policy is dependent on the type of business and what is at stake from a risk management standpoint. Therefore, a company with a high-risk exposure will likely have a larger SIR amount compared to a company with a lower-risk profile. However, because the business is paying for damages and defense costs for the initial claim first (within the SIR amount), the provision will be reflected in the total cost of insurance. As a result, there can be substantial savings on insurance premiums, improving the business’s cash flow.
Another cost-saving benefit of the SIR provision is that the business has greater control over its claims. For example, for smaller incidents, it can decide to settle or even contest a claim if it so chooses. This can help the business maintain a favorable loss history or improve an existing one for better insurance rates in the future.
Businesses that prefer not to have a D&O policy with SIR or that have a risky loss profile, may have the option to buy Side A coverage on a standalone basis. Side A coverage will protect directors and officers when indemnification from the company is not available, typically with a low or even a zero deductible. However, before opting for a standalone policy, much consideration should be given as to whether this is the best option for the business.
To learn how D&O insurance can help protect your business, contact the experts at Oakwood D&O. We have over 15 years of experience specializing in all aspects of management liability, with an ardent focus on directors and officers.
Get in touch: Email Eli Solomon, CEO, at eli@oakwooddno.com or call 323-686-7519. You can also follow Oakwood D&O on LinkedIn.
