What is a deductible vs retention on a malpractice policy?

While the terms deductible and self-insured retention (SIR) are sometimes used interchangeably, they function differently in meaningful ways that affect how your malpractice claim is handled and funded.

With a traditional deductible, the insurance company assumes control of the claim from the outset. The insurer appoints defense counsel, manages the litigation, and pays defense costs and any settlement or judgment. The deductible amount is then owed by the insured to the insurer, either as a reimbursement after the claim is resolved or as a co-payment as expenses are incurred. The insurer remains in the driver's seat throughout the process.

A self-insured retention works differently. With an SIR, the insured is responsible for managing and funding the claim up to the retention amount before the insurer's obligations are triggered. This means you may need to hire your own defense counsel and pay all costs until the SIR is exhausted. Only after you have spent the full retention amount does the insurance carrier step in to assume defense and indemnity responsibilities. Some SIR structures require the insured to obtain the insurer's consent before incurring defense costs or settling within the retention.

The practical implications of this distinction are significant for law firms. Under a deductible arrangement, you benefit from the insurer's claims management expertise from day one. Defense counsel is selected from the insurer's panel of experienced malpractice defense attorneys, and the insurer's claims professionals manage strategy and negotiations. Under an SIR, you bear a greater administrative and financial burden early in the claim.

Most small and mid-size law firm malpractice policies use a deductible structure rather than an SIR. Deductibles for small firm policies typically range from $1,000 to $25,000 per claim. Larger firms may carry SIRs of $25,000 to $250,000 or more, reflecting their greater financial capacity and their preference for controlling the early stages of a claim.

When selecting your deductible or SIR amount, consider both the premium savings and your firm's ability to fund the out-of-pocket amount on short notice. A higher deductible reduces your premium but increases your cash flow exposure when a claim arises.