Why Does Commercial Umbrella Insurance Have Self-Insured Retention?

by Tom Vocatura on Jul 21, 2017 4:40:00 PM

In order to fully understand your Massachusetts business’ commercial umbrella insurance (or any of its insurances), you should fully read through the policy’s paperwork. As you do, you’ll undoubtedly come across a number of technical items that need defining. One that you might notice is a “self-insured retention.” Here’s a look at what self-insured retentions in commercial umbrella policies are.Commercial Umbrella Insurance Massachusetts

Why is There a Self-Insured Retention in My Business’ Commercial Umbrella Insurance Policy?

Reviewing Commercial Umbrella Insurance Policies

Commercial umbrella insurance policies are supplemental, or secondary, insurance policies that serve two primary purposes. They increase limits of underlying policies’ coverages, and they fill in coverage gaps that underlying policies have.

Like most other insurance policies, business umbrella insurance policies have what essentially amounts to deductibles. In business umbrella policies, however, these aren’t typically called deductibles. They’re usually referred to as either “underlying limits” or “self-insured retentions.” Which term is used and how the requirement is fulfilled depends on what function a business umbrella policy is performing in a given claim.Commercial Umbrella Insurance Massachusetts

Extending Coverages Involves Underlying Limits

When a business umbrella insurance policy is extending the limits of an underlying policy, underlying limits usually come into play. The umbrella policy’s underlying limits normally must be met before the policy will provide coverage. They’re typically met by the underlying policy, which should have limits equal to the umbrella policy’s underlying limits if the two policies are properly structured. 

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To see how these different policies’ limits and underlying limits interact with each other, consider the following example. Your Massachusetts business has a claim that’s covered by a primary policy that has a deductible of $1,000 and a limit of $100,000. The claim is also covered by an umbrella policy that has an underlying limit of $100,000 and a limit of $500,000. The claim is for $400,000. The payouts in this situation would likely go as follows:

  1. Your business would pay the primary policy’s deductible of $1,000.

  2. The primary policy would pay the next $99,000, up to its limit of $100,000.

  3. Together, the deductible and primary policy’s payment would cover the umbrella policy’s underlying limit.

  4. As a result, the umbrella policy would cover the claim’s remaining $300,000.

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Filling in Coverage Gaps Involves Self-Insured Retentions

When a business umbrella insurance policy is filling in a coverage gap, there isn’t a primary policy to provide coverage until an underlying limit is fulfilled. Instead, there’s normally a self-insured retention.

A self-insured retention is similar to an underlying limit, but it’s a payment that’s normally paid by the business rather than a primary insurance policy. In other words, a self-insured retention is an amount that your business must pay before its umbrella policy will begin paying for a covered claim that has a retention. 

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As an example, assume your business has the same $400,000 claim. This time, however, the claim isn’t covered by a primary policy. It’s still covered by your business’ umbrella policy, though. The umbrella policy has a $10,000 self-insured retention for this particular type of claim and a limit of $500,000. In this situation, the payouts would likely follow in this order:

  1. Your business would pay the self-insured retention of $10,000.

  2. The primary policy wouldn’t pay anything, because it doesn’t cover the claim.

  3. The umbrella policy would cover the remaining $390,000.

Ask Your Business’ Massachusetts Insurance Agent About Unfamiliar Terms

For more help understanding self-insured retentions, or any other claims you come across while reviewing your business’ commercial umbrella insurance, contact a business’ independent insurance agent. They can explain any technical jargon that you have questions about. If your business doesn’t have an independent agent, find an experienced independent commercial insurance agent who’s licensed in Massachusetts to help you.

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