limits and deductibles, read for a deal.

A limit is the most a policy will pay. A deductible or retention is what the company pays first. In a deal, both are cash questions: how much protection is actually left, and how much risk the company is already carrying.

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how do we diligence a target’s insurance limits and deductibles before we buy?

The short answer. Test limits for what is actually available (per occurrence, aggregate, what is left after paid claims, and whether defense erodes it) against what lenders, customers, and capital partners require, and test deductibles and retentions for what the company pays first, who may pay them after close, and the collateral and open-claim reimbursements behind them. The output is one short table per line with the stated figure, the available figure, the required figure, and the cost or cash to close each gap.

By Nick McClish, Managing Partner · 7 min read · Reviewed October 28, 2026

what are the key takeaways?

1
Available, not stated.
A $2 million aggregate with $1.4 million already paid leaves $600,000 for the rest of the policy year.
2
Retentions are cash.
Large-deductible programs can leave reimbursements and collateral to resolve at closing.
3
Required beats typical.
The credit agreement, key customer contracts, and capital partners set the floor, not a peer average.

which limit and deductible terms matter in a deal?

Terms to read on every declarations page and form. Wording varies by insurer.
Term	What it means	Deal question
Each occurrence or per-claim limit	The most the policy pays for one event or one claim	Is it enough for the largest realistic loss in this business?
Aggregate limit	The most the policy pays for all claims in the policy period	How much is left after claims already paid this year?
Products-completed operations aggregate	A separate aggregate on general liability for injury or damage from finished work or products	Does a contractor or manufacturer have enough left for claims that arrive after the job is done?
Umbrella or excess	Limits that sit above the primary policies	Which underlying policies does it sit over, and does its schedule match what is in force?
Deductible	The insured’s share of a covered loss. The form may deduct it from payment or require reimbursement to the insurer	Who pays first, who handles defense, and what reimbursements or collateral remain?
Self-insured retention	The company pays, or arranges payment of, this amount before the policy responds	Who may satisfy it after close, and who handles the claims meanwhile?
Defense inside the limit	Defense costs reduce the limit	How much limit will be left when a long case ends?
Sublimit	A smaller cap for a named exposure inside a policy	Is a key exposure capped well below the headline limit?

how do you find out how much limit is actually left?

Ask each insurer for currently valued loss runs that show paid and reserved amounts by policy year.
Subtract paid losses from each aggregate, and paid defense too where defense erodes the limit.
Treat open reserves as likely draws on the same aggregate.
For claims-made lines, check retroactive dates and confirm prior claims were reported to the right policy year.
Confirm the umbrella’s schedule of underlying insurance matches the primary policies in force. A mismatch is a hole in the tower.

Whether defense erodes the limit depends on the line and the state. New York’s Regulation 107 generally bars defense costs from reducing limits or deductibles, with exceptions for lines such as D&O, E&O, and employment practices at stated minimum limits and with signed disclosure to the insured. 11 NYCRR 71.3. Read the form rather than assuming.

how do you decide whether the limits are high enough?

There is no universal right number. Start with the figures someone can enforce, then apply judgment and write it down.

Benchmarks for limits, in the order they usually bind.
Benchmark	Where it comes from	Weight in diligence
Credit agreement insurance covenant	The lender’s insurance exhibit	A hard floor at funding, and the evidence has to satisfy it
Customer and lease contracts	Insurance sections, additional insured wording, and waivers of subrogation	A hard floor for the contracts that carry the revenue
Capital partner or sponsor standard	Portfolio insurance guidelines, where one exists	A floor for the hold period
Largest plausible loss	The company’s loss history, its operations, and what similar losses cost	Judgment, documented in the memo
What peers buy	Broker and insurer benchmarking	Context only. A peer average is not a reason by itself

Contract requirements fail quietly. Additional insured endorsements written to the seller may not carry over to a surviving or acquiring entity, so check them for the contracts that matter. A certificate is not the policy: New York’s Department of Financial Services has said a certificate does not confer rights the policy does not give. New York DFS. The closing evidence work is in the acquisition insurance closing checklist.

what should a buyer check on deductibles and self-insured retentions?

Size per line and per claim, plus any annual cap on what the company pays in total.
Deductible or retention. Some liability deductible programs have the insurer pay first and seek reimbursement. Other policies subtract the deductible from the loss payment. Under a self-insured retention, the insured may need to fund losses or defense before insurer obligations attach. Read who handles defense, what counts toward the amount and who must pay it.
Who may satisfy it. Some retention clauses require the named insured to pay. Others are silent. A Fifth Circuit decision treated a $250,000 retention as satisfied by other insurers’ defense spending because the policy did not require the insured to pay it itself. Continental Casualty Co. v. North American Capacity Insurance Co. (5th Cir. 2012). After a change of ownership, the named payer matters.
Open-claim reimbursements. Unbilled deductible reimbursements on open claims are real liabilities. Ask for the insurer’s deductible billing history and the open reserves inside the deductible.
Collateral. NAIC filing guidelines explain why insurers ask for collateral on large deductible workers’ comp programs: the insurer still owes full statutory benefits to injured workers even if the employer cannot reimburse it. NAIC GL-1970. Milliman, an actuarial consulting firm, describes how collateral is sized to expected unpaid losses and their development. Milliman. List each letter of credit, what it secures, and its release terms.
Accruals. Check that retained losses are accrued, including claims incurred but not yet reported. An under-accrual becomes the buyer’s cost after close.

how do limits and deductibles change the deal model?

Common findings and where they usually go. Counsel and the QoE provider set the final treatment.
Finding	Model treatment	Agreement or closing treatment
Limits below a required floor	Pro forma premium for the higher limit	Bought before funding, or a closing condition
Aggregate largely used by open claims	Sensitivity for uninsured exposure in the current year	Specific indemnity or escrow for the open matters
Deductible reimbursements owed on open claims	Debt-like item or working capital	An agreed reserve figure
Collateral posted with an insurer	Liquidity, not premium	Who funds replacement collateral, and who receives the old collateral
Retention the seller cannot fund	Uninsured exposure	Escrow or price
Higher deductible proposed to lower premium	Lower premium, higher retained losses and collateral	A board-level decision with a loss forecast behind it

The premium side of these changes belongs in the pro forma insurance line. Open claims inside a retention belong in open litigation in insurance due diligence.

what does a limits and deductibles review look like for one target?

Hypothetical illustration, not a client. One row per line.
Line	Stated	Available today	Required	Gap and action
General liability	$1 million each occurrence, $2 million aggregate	About $2 million; one small paid claim	$1 million and $2 million in the largest customer contract	None on limits. Confirm the additional insured wording carries to the buyer
Products-completed operations	$2 million aggregate	$1.1 million after two paid defect claims	Not specified	Check the umbrella schedule so the umbrella sits over this aggregate
Umbrella	$5 million	$5 million	$10 million in the credit agreement	Raise to $10 million before funding, with the indication in the pro forma
Workers’ comp	$250,000 deductible per claim	Four open claims with about $410,000 reserved inside the deductible	Lender is silent	Reserve treated as debt-like; replacement collateral negotiated with the seller
Employment practices	$1 million, defense inside the limit, $50,000 retention	$1 million, one open claim	Capital partner asks for the line	Limit shrinks with defense spend; escrow for the open claim

One table per target, with an owner on each action, is what capital partners want to see. It drops straight into the insurance memo capital partners want.

who wrote this guide?

Nick McClish, Managing Partner, Riza Risk

Nick McClish is Managing Partner of Riza Risk, a licensed insurance agency. He founded and sold Pluto Pet Insurance, and he was the first U.S. hire at ManyPets, where he led global growth and the U.S. launch as premium grew from $33M to $280M. He raised and led a search fund, founded Day One Growth, and holds an MBA from London Business School.

good to know.

Straight answers to what deal teams ask about limits and deductibles in insurance due diligence.

What is the difference between a deductible and a self-insured retention?

A deductible is the insured’s share of a covered loss, either subtracted from payment or reimbursed to the insurer, depending on the form. A self-insured retention may require the insured to fund losses or defense before the insurer’s obligations attach. Defense handling, payment rules and what counts toward either amount depend on the wording.

How much umbrella limit should a lower-middle-market company carry?

There is no universal figure. The credit agreement and key customer contracts set the floor, and the company’s largest plausible loss sets the judgment above it.

Does a higher deductible lower the total cost of insurance?

It may reduce premium, but leaves more loss cost with the company and may require collateral. Whether the total falls depends on losses and the terms offered. Compare both with a loss forecast, not premium alone.

What happens to deductible collateral when the company is sold?

It stays with the insurer until the losses it secures are paid or the insurer releases it. The purchase agreement should say who funds replacement collateral and who receives the old collateral back.

Can an aggregate limit be used up before the deal closes?

Yes. Paid claims, and defense where it erodes the limit, reduce the aggregate during the policy year. Ask the insurer for what is left.

see it in dollars before you sign.

Riza helps turn program facts into dollars a deal team can use. Placement, if any, is a separate step.

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