Deductibles and Self-Insured Retention on Professional Liability Policies: What Owners Need to Know
More often than not, owners request that a design professional carry a certain amount of professional liability coverage in connection with its services to the project. The amount owners request typically is tied to the scope of the design professional’s services and the fee being paid. This is right approach but, unfortunately, most owners stop here when they see proof of the coverage. Owners need to take the inquiry one step farther and ask: (i) whether the policy has a deductible or self-insured retention; (ii) the amount of that deductible or self-insured retention; and (iii) how it is paid.
The difference between a deductible and a self-insured retention.
While these terms are often incorrectly used interchangeably, they actually have different meanings and impacts.
A deductible refers to the portion of the loss that is to be paid by the policyholder. Typically an insurer will pay the claim amount on the insured’s behalf and bill back the insured for the deductible. The deductible, unless paid directly by the insured, reduces the total limit of available insurance.
A self insured retention (SIR) is a dollar amount specified in an insurance policy that must be paid by the insured before the insurance carrier will respond to a loss. The SIR does not reduce the limit of available insurance.
Typically, a policy holder can reduce its premiums by having a higher deductible or self-insured retention.
Why this matters to an Owner.
When a design professional has structured its policy with a high deductible or SIR, the risk to an owner is that the design professional cannot fund the SIR (and in some cases the deductible) and therefore, the carrier will not pay out a claim. Since most design professionals do not maintain “assets”, an SIR can be a risk to an owner who may be left with no recovery from the carrier because the SIR is not paid, or the owner itself may be forced to pay the SIR in order to trigger the insurer payment.
Knowing the amount of the design professional’s deductible or SIR and whether it has to be funded before the carrier pays out on a claim are important considerations when entering into the contract. Millions of dollars in coverage is great to see, but knowing what needs to be done to get to “Dollar One” of coverage will allow the owner to assess the risk with eyes wide open.