Self-Insured Retention (SIR) in Construction Insurance Explained

Self-insured retention (SIR) is a mechanism in construction insurance policies that is often compared to a deductible. However, SIRs operate slightly differently and have unique benefits. Understanding how to navigate SIRs can help companies negotiate with insurance companies to find the best balance between the SIR dollar amount and the policy cost.

In this article, we’ll explore the ins and outs of SIR policies, their benefits and disadvantages and how they stand against deductible policies. 

How does SIR work?

A self-insured retention policy is a specific dollar amount that the insured party is responsible for paying out in claims up to that limit. After the insured reaches the upper limit of the SIR, the insurance company will start to handle and pay claims. The insured construction company manages all the claims and pays out for any losses before they reach the SIR limit, and the insurance company doesn’t get involved until the SIR is exhausted. 

SIRs are similar to deductibles except that the builder has control over expenditures within the SIR limit, subject to reporting requirements. Deductibles are controlled by the carrier, which means the insurance company controls all claims from the start. 

This structure incentivizes construction companies to manage risks to avoid paying out-of-pocket for claims if possible. For insurers, GCs with “skin in the game” will likely have better risk management and actively work to keep their claims low. 

Reporting and Record-Keeping

Construction companies with a SIR need to track any losses they pay out. They will need to report all of this to the insurance company if they reach their SIR limit and need the company to start covering claims. The policy will specify what types of claims and costs count towards the SIR, and the GC needs to have records to show the details for all payouts and related expenses. 

Insurers will check the records to ensure that all reported amounts conform to the terms of the policy, as some companies attempt to claim inappropriate expenses, such as gifts to clients, against SIR limits. Many contractors hire a third-party administrator (TPA) to handle the claims against the SIR.

Insurance companies have reporting requirements for claims over a certain amount, when a certain percentage of the SIR is reached, or for certain types of losses. 

For instance, a policy with a $100,000 SIR might require reporting for any single claim over $25,000, when the insured reaches 50% of the SIR in more minor claims or when a significant loss such as a collapse or loss of a limb happens. A different policy could require the insured company to report to the insurance carrier any claim or cost of repair exceeding $10,000 — the specific amount is set by the insurer — or any claim that impacts more than 5 units, involves serious injury or death or denies the tenant the ability to use or inhabit the unit. Each policy will have reporting requirements set by the carrier. 

Insurers require this reporting to give them notice that the insured is getting closer to exhausting the SIR, and the insurer may be required to step in and start covering claims. In the case of a catastrophic loss, even if the initial claim isn’t over the SIR limits, it is likely to grow because of the nature of the loss.

Carriers may also require insureds to report annual SIR spend. Once SIR is exhausted, the carrier will begin to pay the first dollar, so the reporting helps determine and prepare for stepping in.

Structure and Balancing Risk

Companies can negotiate with insurers based on their business needs. Setting aside funds to cover claims within the SIR should be part of a construction company’s overall cash flow management strategy. Some may choose a higher SIR with a lower policy cost, while others may prefer a lower SIR and be willing to pay more in premiums. 

When pricing insurance, insurers use actuarial models to consider a company’s project types, risks and loss history. It is the policy owner’s responsibility to maintain the SIR. To handle claims, reporting, and record-keeping, GCs need their administrative staff to stay on top of these tasks or hire a TPA to manage the paperwork.

Construction companies can also work with the carrier to structure SIRs during the underwriting process to cover a region, a division, a company, or certain parts of a project. For instance, a residential development project with 125 new homes could be divided into 5 SIRs covering 25 homes each. The policy may also have an aggregate SIR limit and a per-occurrence SIR limit. With this structure, the policy could have an aggregate SIR of $1 million and a $250,000 limit for each occurrence.

Differences Between a Deductible and an SIR

Smaller construction companies may only choose an insurance policy with a deductible. Larger companies often prefer SIRs but might opt for a deductible policy if that best suits their business needs.

A major difference between a SIR and a deductible is in who handles the claims. With a deductible, the insurer handles claims and bills up to the deductible amount and bills the insured company for any amounts under the deductible limit. SIR, on the other hand, requires the insured to take care of all claims and payouts until the SIR limit is reached.

The Pros and Cons of SIRs

SIRs are an advantage for companies with solid paperwork controls and risk management.

Larger construction companies often opt for SIRs for the following reasons:

• The premium costs may be lower than with a deductible policy, especially with a higher SIR limit.
• The construction company can address exposures and manage risks well, thereby minimizing the claims paid out.
• Control of smaller claims rests with the GC.
• Policies can have higher liability limits.
• Flexibility to structure SIR amounts within the policy to cover different portions of projects.
• If the losses are minimal enough that they don’t need to be reported to the insurer, claims may not appear on loss history.
• The financial incentives to mitigate risks can prompt more proactive risk management.

On the flip side, there are some disadvantages to SIRs:

• GCs face increased work to manage and track claims, even if a TPA is involved.
• Policy requirements are complex, so understanding what types of claims are applied against the SIR can require careful reading of the insurance contract to comply.
• The GC has more financial responsibility for claims within the SIR limit.
• A company’s loss history is more significant when determining the cost of the policy.

Choosing the Right Policy

SIRs can help construction contractors manage their overall costs and encourage careful risk management. Companies can negotiate their policy and SIR limits with the insurer to find the best balance, and SIRs allow GCs more control over minor claims.

As with all policies, the details matter, and negotiating pricing, what types of losses are covered, and whether the defense of claims is inside or outside the limits can help align the insurance with a company’s needs.

Just as builders, subcontractors and owners collaborate in construction projects, insurance brokers and companies can help general contractors achieve their business goals. Therefore, providing a complete insurance submission can help companies work well with insurers. Ensuring the construction company, broker, and insurance company are on the same page with the policy details can help mitigate problems should significant losses occur.

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