What Does “Paid When Incurred” Mean in Insurance?

“Paid when incurred” is an insurance concept defining when an insurer’s obligation to disburse funds arises. This clause means the insurer’s financial responsibility activates only after costs have been formally settled by the policyholder.

Defining “Paid When Incurred”

“Incurred” refers to when a liability or expense comes into existence, regardless of when payment is made. For example, a medical expense is incurred when a patient receives treatment, even if the bill is not paid until weeks later. “Paid” signifies the actual disbursement of funds, meaning money has been transferred from the policyholder to the service provider.

The phrase “paid when incurred” means an insurer’s obligation to reimburse is triggered only after the policyholder has paid the incurred cost. The policyholder must first satisfy the financial obligation from their own resources. The insurer’s duty to provide coverage activates only upon submission of proof of that payment.

How It Operates in Insurance Policies

When a “paid when incurred” clause is present, the policyholder assumes the initial financial responsibility for the covered expense. This procedural flow requires the insured to first pay the cost, such as a medical bill or a liability settlement, out of their own funds. Subsequently, the policyholder must submit proof of this payment to the insurer to initiate the reimbursement process. This documentation typically includes itemized invoices, receipts, and evidence of the financial transaction, such as bank statements or canceled checks.

The insurer’s payment obligation is strictly contingent upon receiving this verifiable proof of actual payment by the policyholder. Without concrete evidence that the policyholder has already satisfied the debt, the insurer is not obligated to provide reimbursement. Once proper documentation is submitted and validated, the insurer then processes the claim for reimbursement. The typical timing for such reimbursements can vary but often occurs within a period of 30 to 60 days following the insurer’s receipt and approval of all required documentation.

Typical Insurance Policy Applications

“Paid when incurred” provisions are commonly found in several types of insurance policies, particularly where the insured party might handle initial payments for specific reasons. One common application is in certain professional liability insurance policies, especially regarding defense costs. In these instances, the insured professional might pay legal fees directly to their chosen counsel to maintain control over their defense strategy, subsequently seeking reimbursement from their insurer. This arrangement allows the insured to manage immediate expenditures before seeking coverage.

Another area where this clause frequently appears is within some health insurance reimbursement models, such as certain Health Reimbursement Arrangements (HRAs). Under an HRA, an employer allocates a specific amount of money for employees to use for healthcare costs, but the employee typically pays for the service first. The employee then submits proof of payment to the HRA administrator for reimbursement, aligning with the “paid when incurred” principle. Similarly, some commercial general liability policies may include this clause for specific types of expenses, ensuring the insured has paid the cost before indemnification.