Understanding the differences between ‘Pay on Behalf of’ and ‘Reimbursement’
“Pay on behalf of” and “reimbursement” are two different approaches to paying the bills associated with a claim. Will the policy holder pay everything first and then wait to be refunded by the insurance company? Or will the insurance company pay the bills up front?
There are pros and cons to both. But whichever way your insurance policy works, it helps to know and understand it before a claim happens.
Check your professional liability, cyber insurance, D&O insurance and employment practices liability policy wordings for specifications on how payment happens once a claim is filed. Once you file a claim with your insurance company, and bills, for example legal fees start coming in, who’s responsible for paying? Depending on the policy, you’ll find one of the following payment models: “reimbursement” and “pay on behalf of”. Every insurance buyer should understand the distinction between the two.
In the “reimbursement” model, the insured pays all costs up front and then seeks reimbursement from the insurer. This can be very costly for a small company hit with a seven-figure ransomware attack. Some organizations may find this model financially challenging. The insured must be prepared to carry all claims-related costs until such time that they are reimbursed by the insurer.
On the plus side, for the insured this means it is within their power to ensure that defence counsel is paid promptly. There’s also a risk for the insured however, that the insurer may decide that not all of the costs incurred are covered by the policy leaving the insured with unexpected, uncovered costs.
Pay on behalf of
With the “pay on behalf of” model the insurance company pays costs directly i.e. to defence counsel. This means that the insured organizations avoid the need to pay up front and deal with the reimbursement process. Of course, this also means that the insured does not control payment timing or process and cannot easily monitor the insured limit erosion – something that needs to be taken into consideration.
The ‘pay on behalf of’ model is gaining traction as the preferred approach for many companies, regardless of other policy terms such as the insured holding the duty to defend. You’ll find guidance on the way claims costs are to be paid in the insuring agreement section of your policy. Look for language such as:
“the underwriters will pay on behalf of the insured” or “pay on behalf of” policy.
On a cyber policy, a reimbursement policy may read something like this:
“we will reimburse the privacy notification and crisis management costs that you incur with prior written consent from us…”
Understanding how the money is to flow under your particular insurance policy is really important for every insurance buyer in order to avoid surprises should there be a claim.