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Self-insured retention (SIR)
Self-insured retention (SIR) is the amount a policyholder agrees to pay out of pocket before an insurance company begins to cover certain claims. It’s similar to a deductible but is typically used in liability policies, especially in commercial umbrella and excess liability insurance coverage.
What is a self-insured retention?
A self-insured retention is the specific dollar amount a business must pay to handle a claim before their insurance coverage kicks in. Unlike a deductible, which the insurer typically subtracts from the amount paid on a covered claim, a SIR requires the policyholder to manage and fund the entire claim—including indemnity or defense costs—up to the retention limit.
SIRs are commonly found in:
- General liability insurance
- Professional liability insurance or errors and omissions (E&O) insurance
- Commercial umbrella insurance and excess liability insurance
For small businesses, understanding self-insured retention is essential for risk management and out-of-pocket expenses. While choosing a policy with a SIR can reduce premium costs, it also shifts a higher amount of risk and more financial responsibility to the business owner.
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What is the difference between a deductible and a self-insured retention?
A deductible and a self-insured retention (SIR) both require the policyholder to contribute toward a claim, but they work in different ways – especially when it comes to who handles the claim and when the insurer gets involved.
- A deductible is subtracted from the claim amount after the insurer takes over the claim. Because of this, insurers will sometimes have collateral requirements in order for the policy to take effect (such as a letter of credit).
- A self-insured retention must be paid by the business before the insurer even becomes involved. In the case of a SIR policy, insurers generally don't require any collateral.
With a SIR, the business may also be responsible for managing the claim directly, including coordinating legal defense and settlements, until the retention amount is met.
| Feature | Deductible | Self-insured retention (SIR) |
|---|---|---|
Insurer involvement | The insurer manages and pays the claim immediately, minus the deductible amount | The policyholder must manage and fund the claim entirely until the SIR is met |
Claim handling | Insurer is responsible for defense and settlement costs | Policyholder is responsible for managing legal defense and settlement costs |
Payment structure | Deductible is subtracted from the insurer's payment | SIR is paid out of pocket before the insurer pays anything |
Common policies | First-party coverages (e.g., property and auto), as well as some liability policies | Primarily in liability policies, especially umbrella and excess coverage |
With a deductible, your insurer is involved in the claim from the start. With a self-insured retention, you’re on your own until you pay the full retention amount.
For example, if you have a $10,000 deductible and a $50,000 claim, your insurer pays $40,000.
With a $10,000 SIR, your business pays the first $10,000 in legal and settlement costs directly – and only then does the insurer step in.
How does self-insured retention work in small business insurance?
While SIRs are most often associated with umbrella or excess liability coverage, they can appear in other types of small business insurance policies. Here’s how:
- General liability insurance: Custom or high-limit general liability policies may include a self-insured retention. This applies to third-party bodily injury or property damage claims before insurer involvement.
- Professional liability / Errors and omissions insurance: Independent contractors and service providers may see a SIR in policies covering claims of negligence, misrepresentation, or failure to deliver services.
- Employment practices liability insurance (EPLI): Policies covering claims of discrimination, harassment, or wrongful termination often have a SIR, requiring the business to pay initial costs.
- Cyber insurance: SIRs are also common in cyber liability coverage, especially for businesses that manage sensitive customer data or conduct business online.
How does self-insured retention work in umbrella policies?
Umbrella insurance provides extra liability protection by extending the limits of your primary policies – such as general liability, commercial auto, or employer’s liability coverage. However, when there’s no underlying policy that applies to a specific claim, the umbrella policy may step in – but only after the self-insured retention is paid.
This is where a self-insured retention comes into play. It fills the gap when the umbrella “drops down” to cover a claim excluded from the underlying insurance.
For example, if a business faces a libel lawsuit but doesn't carry media liability insurance, its umbrella policy may respond – after the SIR limit is paid. If the retention is $10,000, the business must cover that amount before the umbrella insurer pays anything.
Self-insured retention example
Let’s say a media production company has a general liability policy that excludes personal and advertising injuries, like libel. This exclusion is common for media businesses because their risk in this area is higher, and they're usually advised to purchase a separate media liability policy.
However, if the company doesn't have media liability insurance and gets sued for libel, their umbrella policy may cover the claim – but only after the company pays the full self-insured retention amount (e.g., $25,000). This is possible because the umbrella policy is sitting above the general liability policy, even if that policy excludes libel. The SIR acts as the entry point for the umbrella to step in.
It's important to note, that in order to purchase umbrella insurance, a business must carry one or more eligible underlying policies, like general liability or commercial auto. The umbrella extends coverage for those base policies and can sometimes provide limited “drop-down” coverage for exclusions – triggered by the SIR.
While choosing a policy with a SIR can reduce premium costs, it also shifts a higher amount of risk and more financial responsibility to the business owner.
What is a self-insured retention endorsement?
Insurance policies sometimes include a self-insured retention endorsement, which spells out how the SIR works and what the policyholder must do in the event of a claim. The Insurance Services Office (ISO) self-insured retention endorsement form is one example insurers may use to clarify responsibilities for both parties.
These SIR provisions may also specify the types of claims the retention policy applies to, and whether defense costs count toward the SIR.
Why self-insured retention matters for small businesses
Choosing a policy with a self-insured retention can help small businesses lower their insurance costs. However, this comes with increased out-of-pocket risk and claim management responsibilities. It’s important to understand that:
- SIRs shift more financial and administrative burden to the business.
- They may not be a good fit for businesses without reliable cash flow.
- Understanding policy language and consulting with an insurance agent can help you avoid surprise costs.
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Updated: June 10, 2025
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