Indemnity Versus Pay-on-Behalf of Language

In reading umbrella policies, we have found two differing versions of the insuring agreement. One states that the insurer will “indemnify the insured,” and the other declares that the insurer will “pay on behalf of the insured.” What is the difference between these two insuring agreements when it comes to the insurer's duty to pay?

Pennsylvania Subscriber

Policies that indemnify the insured do not require the insurer to make payment to the insured until the insured has first made payment for covered damages or expenses. So, a potential disadvantage of the indemnity language is that insureds use their own funds to pay for damages and defense, and then seek reimbursement from the insurer.

Under the pay-on-behalf-of language, the insurer promises to pay damages on behalf of the insured. This means that the insured does not have to first make payment and then seek reimbursement from the insurer. Expenses for defense are normally paid by the insurer as they are incurred if the umbrella insurer has taken over the defense role.

The agreement to pay claims and costs of defense on behalf of the insured is generally preferable to a promise to indemnify, that is, to reimburse the insured. From the perspective of the insured, it is obviously preferable that the insurer directly pay all settlements, judgments, and defense costs as they are incurred.

Note that some umbrella policies do not contain language such as “indemnify” or “pay on behalf of.” Instead, such policies provide that the insurer will “pay the loss” or will “pay those sums the insured is legally obligated to pay.” This means that the insurer will pay the amounts owed by the insured and will pay for the insured, or basically, the insurer will pay on behalf of the insured.

In the actual payment practices of umbrella insurers, there may be little difference between indemnify, pay-on-behalf-of, or pay the loss policies. However, an insured clearly would be better off with the other-than-indemnify language