The use of self-insured retentions in insurance policies is becoming more common. Self-insured retentions benefit the insured by helping to reduce the cost of insurance by the insured assuming a portion of the risk and by the handling of smaller claims on its own while providing insurance coverage for a catastrophic loss. With the increased use of self-insured retentions, it becomes more likely that you will encounter one. The purpose of this article is to briefly explain the differences between a self-insured retention and a deductible and to explain why the differences matter from the trial lawyer’s perspective.
A. Self-insured retention vs. deductible
A self-insured retention is a dollar amount that must be paid by the insured before the insurer will respond to a loss. This typically means that the insured is responsible for all defense and indemnity costs related to a claim until the self-insured retention limit is met. The insurer would take over defense of the claim only after the self-insured retention is met and make indemnity payments only for the portion of the judgment above the self-insured retention amount.
On the other hand, in a liability policy containing a deductible the insurer pays the defense and indemnity costs from dollar one and bills back the deductible amount to the insured. With a deductible, the insurer is typically responsible for defense costs from the initiation of the claim, even before the deductible amount is met.
B. Important distinctions between a self-insured retention and a deductible
One manner in which the difference between a self-insured retention and a deductible can impact a claim is that the financial decision makers have different motives for settling claims. With a self-insured retention, the insured is typically responsible for all aspects of handling and defending a claim until the self-insured retention is satisfied. The most important function of the claims process, for an insured handling its own claims within its retention amount, is to save money on claims payments. Such claims have a direct bearing on the bottom line of the company and therefore more emphasis is placed on delaying claims payments and keeping the costs down.
With a deductible, the insurer will typically handle these aspects of the claim from the initiation of the claim. Claims payments by insurers, typically, do not affect the bottom line of the insurer. Rather, the expense associated with handling claims (allocated loss adjustment expense) does affect the insurer’s profit margin and as such, the claims process tends to be more liberal and fastidious.
A self-insured retention can often, but not always, be an indication that there will be more funds available to compensate an injured party. For example, if a truck driver has a $1 million policy with a $250,000 self-insured retention, the trucker will typically be responsible for payment of expenses and damages up to $250,000, which will not erode the policy amount, meaning after the $250,000 is spent, there is still $1 million available in insurance. In a policy with a deductible of $250,000 and a $1 million limit, in practice, there is often actually $750,000 of insurance available because the deductible reduces the policy limits. While this issue is more likely to impact an insured than an injured party, in cases where recovery is likely to be limited to amount of insurance available, this can have the effect of reducing the amount of recovery available to an injured party.
A self-insured retention can also have the exact opposite impact if the insured is unable to satisfy the retention amount. In a self-insured retention policy, the insurer is liable only for the amount above the self-insured retention limit. If the judgment or settlement does not exceed the self-insured retention, the insurer has no duty to pay. However, even if there is a judgment or settlement above the self-insured retention limit, most self-insured retention policies contain provisions that the insurer is responsible only for amounts over the self-insured retention limit, regardless of whether the limit was actually paid. Of course, the terms and conditions of the self-insured retention endorsement will clarify each party’s obligations under the contract, so the trial lawyer’s analysis starts and ends with the policy language.
C. Recovering damages where the insured appears unable to satisfy the self-insured retention amount
Typically, in situations where policy holders assume very large risks, such as an insured which holds a policy with a large self-insured retention, excess insurers will require the insured to provide collateral, such as proof of a line of credit or a bond. The excess insurer requires this to prevent the excess insurance policy from becoming primary if the insured cannot satisfy the self-insured retention. In the trucking industry, motor-carriers with large self-insured retention policies are typically required to post a bond because of the compulsory nature of the insurance requirements under the Federal Motor Carrier Safety Regulations. The potential bond or line of credit is a resource that may be available to satisfy a judgment against an insured with a large self-insured retention should the insured not be able to indemnify a loss. Discovery should be conducted to determine if a letter of credit or bond exists.
In a situation where the insured is unable to satisfy the self-insured retention or files bankruptcy, whether the claimant can reform the insurance policy to drop down and provide dollar-one coverage is an unsettled question. Most insurers have policy language which requires the insured to actually satisfy the self-insured retention amount and will take the position that if the insured files bankruptcy or cannot satisfy the self-insured retention for other reasons, it has not fulfilled the condition precedent which triggers the insurer’s obligation. The majority of courts which have addressed this issue have held that the insured’s inability to satisfy the self-insured retention does not eliminate the insurer’s obligations. Courts that take this position often rely on state insurance statutes and / or public policy arguments in requiring an insurer to make payment to an injured claimant even if the insured was unable to satisfy the self-insured retention. Not all courts have reached such conclusions, however, and it is important to be aware that in some jurisdictions courts will enforce contract provisions which treat the insureds’ satisfaction of the self-insured retention as a condition precedent to the insurer’s obligation to make payment.
In conclusion, both liability deductibles and self-insured retention amounts pose special problems for the trial lawyer attempting to settle a claim with an insurer. It is imperative that the lawyer procure the actual policy language before attempting to resolve any claims.