Every professional liability policy asks the policyholder to share some of the cost of a claim. That share is usually called a deductible or a self-insured retention. The two terms sound similar, but the way they work can differ in ways that affect how a claim unfolds.
Deductibles
A deductible is typically an amount subtracted from what the insurer pays. In many E&O policies, the insurer handles the claim from the start and then looks to the policyholder to reimburse the deductible amount. The insurer may be responsible for defense from the beginning, subject to the deductible agreement.
Self-Insured Retentions
A self-insured retention, or SIR, is an amount the policyholder pays first, before the insurer’s obligation begins. Under many SIR structures, the policyholder is responsible for paying defense costs up to the retention, and the insurer takes over after it is met. Policies differ on who controls the defense during that stage and how the retention is satisfied.
Why the Difference Matters
The practical effect is about who pays what, and when. With an SIR, you may need to fund legal fees yourself in the early months of a dispute. With a deductible, the insurer may pay first and recoup later. Ask whether your policy requires you to pay the retention up front and whether payments by others, such as a client or another insurer, count toward it.
Does Defense Count Toward It?
Some policies apply the deductible or retention to both defense costs and damages. Others apply it only to damages, leaving defense fully covered from the first dollar. Read the language that says what counts. This affects how quickly coverage begins, especially in claims that never reach settlement.
Choosing a Level
Higher deductibles typically reduce premium but increase out-of-pocket exposure. Smaller firms should consider whether they could comfortably fund the retention if a claim arose. Larger firms may choose higher retentions to manage cost. Consider your cash reserves, contract requirements, and appetite for risk, and ask whether a client contract limits the retention you may carry.
Sublimits and Claim Expenses
Some policies apply different retentions to different coverage parts, such as regulatory proceedings or disciplinary matters. Check the schedule for any variations.
Notice Still Comes First
Whatever retention applies, reporting a claim or potential claim promptly is typically required. Waiting until you have spent the retention before notifying the carrier can jeopardize coverage.
Terms vary by carrier and policy form. An independent agent can help you compare deductible and retention options and match them to your firm’s finances and contracts.
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