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Deductibles and self-insured retentions under insurance policies

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This book was written by Michael Dew, a Vancouver lawyer who practices civil litigation, including representing persons who have been denied coverage under property insurance policies, or liability insurance policies. If you have been denied insurance coverage and require assistance with making a claim against your insurer call Michael at 604 895 3160.
Insurance policies generally do not cover the “first dollar” of a loss. Rather, most insurance policies specify an amount which must be exceeded before the insurer will be required to contribute to the loss. Such threshold amounts may be either a “deductible” or a “self-insured retention”.
 There are a number of differences between deductibles and self-insured retentions.
From an accounting perspective, under policies with deductibles the insurer pays all of the losses and then is refunded the deductible by the insured, but under policies with self-insured retentions the insured pays all amounts until the self-insured retention threshold, at which point the insurer takes over and covers all future amounts. However, in practice this difference is sometimes irrelevant because, for example, for small losses (less than the deductible amount) the insured will simply not make a claim and so will bear losses less than the deductible amount.
Under liability policies with large deductibles defence costs may or may not be applied against the deductible:
  • If defence costs are not applied against the deductible and the claim is dismissed but there are unrecovered legal costs (i.e. not recovered from the unsuccessful plaintiff) then the insurer and not the insured will bear the cost of defence costs. 
  • If defence costs are applied against the deductible then the insured will bear the cost of unrecovered legal costs when a claim is successfully defended.
In the case of a self-insured retention all costs, including defence costs, will be borne by the insured until the self-insured retention amount is reached.
For strategy reasons, especially in the case of large deductibles or self-insured retentions under liability insurance policies, the insured may not want the plaintiff to know how much the deductible or self-insured retention amount is. However, certificates of insurance must state self-insured retention amounts because the insurance does not apply at all until the self-insured retention amount is reached. Conversely, under a policy with a deductible the insurer is responsible for paying all losses and merely has a right to reimbursement from the insured for the deductible amount and therefore the certificate of insurance for a deductible policy need not divulge the fact that a deductible applies, or the amount of the deductible. For this reason insureds may prefer a policy with a deductible rather than a self-insured retention.
Rules of court pertaining to document production and examination for discovery may require the amount available under applicable insurance policies to be disclosed. 
A further difference between a deductible and a self-insured retention is that a deductible may erode the policy limits, but a self-insured retention never erodes the policy limits. Consider a $1 million deductible or self-insured retention and a $10 million dollar policy limits. With the self-insured retention the insured will (in the event of a large amount being payable to the claimant) pay the first $1 million and the insurer will pay the next $10 million for a total payment of $11 million. Depending on the wording of the policy in the case of a deductible of $1 million the insurer pay only $9 million for total coverage (including the deductible) of $10 million.
Insurers often prefer deductibles rather than self-insured retentions because then the insurer has control of the claim from the outset which allows them to ensure that mistakes are not made in the defence of the claim which may adversely affect them as the ones responsible for paying large losses.