Many policyholders choose to self-insure at the primary level for some types of insurance coverage (general liability, employment practices, etc.), and purchase umbrella and excess policies that sit above a self-insured retention. A self-insured retention (“SIR”) is the amount of the loss a policyholder must pay before the umbrella policy would be required to respond. See Spaulding Composites Co., Inc. v. Aetna Cas. & Sur. Co., 176 N.J. 25, 36 n.4 (2003) (“Excess insurance is secondary coverage that ordinarily attaches only after a predetermined amount of primary insurance or self-insured retention has been exhausted”). Many policies may include an endorsement which provides that there is an aggregate limit in the SIR. For example, the endorsement may read:
The total limit of liability of the Company as stated in the policy declarations shall apply excess of the Self- Insured Retention as stated in the endorsement and the Named Insured agrees to assume all costs within the Self-Insured Retention:
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Using this endorsement as an example, assuming that defense costs can be used to erode the SIR, to reach the umbrella policy that sits above the SIR, the policyholder must have a claim with one occurrence where the defense and/or indemnity costs associated with that occurrence are in excess of $1,000,000, or have many occurrences which has resulted in the payment of covered claims which total $3,000,000, thus exhausting the SIR. If defense costs don’t erode the SIR, in order to reach the umbrella policy that sits above the SIR, the policyholder must have a claim with an occurrence where the indemnity for that occurrence exceeds $1,000,000, or have many occurrences which has already resulted in indemnity payments for covered claims totaling $3,000,000, thus exhausting the SIR.
If there is an aggregate limit in the SIR, it is important for policyholders to carefully manage the covered claims within the SIR. Managing the covered claims includes inputting information into a database with information related to each claim, tracking defense costs paid, tracking indemnity amounts paid, and providing updates to the umbrella and excess carriers on the status of the claims and exhaustion of the aggregate limit in the SIR. If a policyholder does not manage the claims within the SIR, it risks making payments exceeding the aggregate limit in the SIR, and thus overpaying for claims that should have been paid by the umbrella carrier. Similarly, if the policyholder does not manage the claims within the SIR, it risks being unable to prove exhaustion of the SIR to the umbrella and excess carriers.
Policyholders who choose to self-insure do so in order to manage liability and reduce paying insurance premiums. See CSX Trans. Inc. v. Continental Ins. Co., 343 Md. 216, 244 (1996) (where the court explained the reasons companies have self-insured retentions). The savings on reduced premiums are for naught if there is an aggregate limit in the SIR, and mismanagement of the claims results in either overpayments or the inability to prove exhaustion of the aggregate. Those problems can be avoided if the policyholder manages the losses within the self-insured retention and keeps the lines of communication open with its umbrella and excess carriers.
Policyholders with aggregate limits in their SIRs should have their claims files audited to determine the status of the SIR exhaustion, as well as whether information necessary to prove exhaustion of the SIR is being properly maintained. Failure to do so may result in lost coverage opportunities.