Legal Definitions - self-insured retention

Self-Insured Retention (SIR)

Self-insured retention, often abbreviated as SIR, refers to a specific amount of money that an insured party (typically a business or organization) must pay out of its own pocket for a covered loss before its insurance policy begins to pay benefits. It functions similarly to a deductible but often involves the policyholder taking a more active role in managing and paying for the initial portion of a claim, including defense costs, until the SIR amount is exhausted. Policyholders often agree to a higher SIR in exchange for lower insurance premiums.

Examples:

• Example 1: Commercial General Liability
  A large construction company holds a Commercial General Liability (CGL) insurance policy with a $500,000 self-insured retention. A significant accident occurs on one of their building sites, leading to a lawsuit claiming $2 million in damages. The construction company is responsible for covering the first $500,000 of all associated costs, including legal defense fees and any settlement or judgment amounts. Only after the company has paid this initial $500,000 will its CGL insurer begin to contribute to the remaining covered expenses, up to the policy's limits.
• Example 2: Professional Liability for a Consulting Firm
  An engineering consulting firm has a professional liability (Errors & Omissions) insurance policy with a $150,000 self-insured retention. A client sues the firm, alleging negligence in their design work, seeking $1 million in compensation. The consulting firm must pay the first $150,000 of the legal costs, including attorney fees and any potential settlement, directly from its own funds. Once this $150,000 threshold is met, the insurance company will then step in to cover the remaining eligible costs of the claim.
• Example 3: Product Liability for a Manufacturer
  A consumer electronics manufacturer has a product liability insurance policy with a $250,000 self-insured retention. A defect in one of their products causes widespread damage, leading to multiple claims and a class-action lawsuit. The manufacturer is obligated to manage and pay for the initial $250,000 in legal defense, investigation costs, and any payouts to affected customers. After the manufacturer has incurred and paid $250,000 in these covered expenses, their product liability insurer will then assume responsibility for the remaining covered damages, up to the policy's maximum coverage.