Self-Insured Retention
The dollar amount the insured must pay out of pocket on claims covered by the umbrella but not by any underlying policy, before the umbrella responds.
What It Is
A Self-Insured Retention (SIR) is a deductible-like amount that the insured must pay out of pocket before a commercial umbrella policy responds to a claim that is covered by the umbrella but not covered by any underlying policy. The SIR applies only when the umbrella 'drops down' to provide coverage for a claim outside the scope of the underlying policies, it does not apply when the umbrella pays excess over exhausted underlying limits.
Typical SIR amounts range from $10,000 to $25,000 for mid-market commercial accounts, though they can be much higher for large risks. The SIR effectively creates a small deductible for the drop-down function, preventing the umbrella from becoming a primary policy for claims that should be covered by a missing or insufficient underlying policy.
The SIR is distinct from a retained limit. A retained limit is the amount the insured must fund before an excess policy attaches, essentially the total of all underlying limits. The SIR specifically applies to umbrella drop-down situations where no underlying coverage exists for a particular claim type.
Why It Matters for Brokers
Brokers must clearly explain the SIR to clients so they understand their out-of-pocket obligation when the umbrella drops down. More importantly, brokers should analyze whether the umbrella's drop-down coverage (subject to SIR) is adequate for the client's needs, or whether additional underlying coverage should be purchased to avoid relying on the umbrella's drop-down function for significant exposures. Identifying gaps between the umbrella's expected underlying coverage and the actual underlying policies is one of the most valuable services a broker can provide during program design, as undetected gaps can void umbrella coverage at the worst possible time. When marketing excess programs, brokers should clearly document whether each layer provides true umbrella drop-down coverage or strict excess coverage, as this distinction materially affects the client's protection when underlying limits are inadequate.
Real-World Example
A technology company has a CGL and auto policy as underlying coverage, with a $5M umbrella carrying a $10,000 SIR. An employee sues for employment practices discrimination, a claim not covered by the CGL or auto policy but covered by the umbrella. The umbrella drops down after the company pays the $10,000 SIR, covering up to $5M in defense and damages. If the company had a standalone EPLI policy with $1M limits as scheduled underlying insurance, the EPLI would pay first and the umbrella would provide excess over the EPLI limit with no SIR.
Common Mistakes
- 1Confusing the SIR with a standard deductible, the SIR applies only to drop-down situations, not when the umbrella pays excess over exhausted underlying limits.
- 2Not identifying claims types that would trigger the umbrella's drop-down (and therefore the SIR) versus claims that would be covered by underlying policies.
- 3Accepting a high SIR without evaluating whether purchasing an underlying policy for the specific exposure would be more cost-effective.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker displays the SIR amount and identifies which types of claims would trigger the drop-down function (and therefore the SIR) based on the gap analysis between the umbrella's coverage and the underlying policies. The system highlights scenarios where purchasing an underlying policy might be more cost-effective than relying on drop-down coverage with a large SIR.