Understanding the terms in a commercial umbrella insurance policy (or any insurance policy) is a fundamental step toward fully understanding what protections the policy affords. As you read through your Vermont company’s commercial umbrella policy, “self-insured retention” is one term you may come across. Here’s an explanation of what this is and how it impacts the protections a policy provides.
Explaining the Self-Insured Retention Aspect of Your Vermont Commercial Umbrella Insurance
What Commercial Umbrella Insurance Does
Commercial umbrella insurance policies are a secondary, or supplemental form of insurance. They supplement primary, or underlying, insurance policies in two ways. Commercial umbrella policies extend the limits of primary policies and fill in primary policies’ coverage gaps.
As is true with many other types of insurance policies, commercial umbrella policies have features that are similar to deductibles. The term “deductible” often isn’t actually used in commercial umbrella policies, but any “underlying limit” or “self-insured retention” (SIR) found in these policies serve a comparable purpose.
Which of these two terms is used depends on how a commercial umbrella policy is supplementing underlying policies. In either case, however, a commercial umbrella policy typically won’t pay on a claim until its applicable underlying limit or SIR is met.
Underlying Limits Come into Play When Extending Coverages
When a commercial umbrella policy is used to extend the limits afforded by an underlying insurance policy, the term “underlying limits” is usually used.
Underlying limits generally state how much underlying coverage must be provided by a primary insurance policy. If a valid claim is filed, the umbrella policy will typically only begin paying after the underlying limits have been met by a primary policy’s coverage. Should a company fail to carry sufficient underlying coverage, its business umbrella insurance policy’s coverage may be compromised or even voided.
As an example, assume your Vermont company carries a primary insurance policy and a business umbrella insurance policy. The primary insurance policy has a limit of $600,000, and its deductible is $2,000. The business umbrella policy has a limit of $1 million and a $600,000 underlying limit.
Now, assume your company had a valid claim worth $750,000. Your company’s claim would probably be paid in the following order:
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The $2,000 deductible would be paid by your company.
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The next $598,000 would be paid by the primary policy, so its $600,000 limit was met.
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The final $150,000 would be paid by the umbrella policy, as its $600,000 underlying limit had been satisfied.
Self-Insured Retentions Come into Play When Filling Coverage Gaps
When a commercial umbrella policy is used to fill in coverage gaps left by underlying policies, there aren’t any primary policies that can meet an underlying limit. Therefore, a self-insured retention is used instead of an underlying limit.
A SIR is normally a specific amount your company must pay for a claim before the business umbrella insurance will pay on the claim. It’s very much like a deductible, but a different term is used because of the type of insurance policy.
For an example, figure your company has no primary policy that covers the above $750,000 claim. Its business umbrella policy covers the claim and has a $1 million limit. The policy also has a $5,000 SIR. In this scenario, the claim would likely be paid as follows:
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The $5,000 SIR would be paid by your company.
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The remaining $745,000 would be paid by the umbrella policy.
Vermont Insurance Agents Know Insurance Terms
If you have any questions about terms in your company’s commercial umbrella insurance policy, contact a Vermont independent insurance agent. An agent in the state who specializes in commercial insurance can review a policy with you and help you understand all the terms contained within it.
