What are Supplementary Payments?
The standard general liability policy includes a coverage called Supplementary Payments. This coverage pays the cost of defending your firm or any other insured against lawsuits covered by the policy.
Defense Versus Indemnity Coverage
Supplementary Payments (defense) is one of two basic coverages afforded by a typical liability policy. The other is indemnity coverage. Defense and indemnity are provided separately. Only indemnity coverage is subject to limits.
Indemnity coverage applies to damages and settlements your insurer pays on your behalf to third parties. It includes payments your insurer makes under Coverages A, B, or C. Coverage A, Bodily Injury and Property Damage Liability, covers damages you are legally obligated to pay because of bodily injury or property damage caused by an occurrence. Coverage B, Personal and Advertising Injury, covers damages you are legally obligated to pay because of personal and advertising injury caused by an offense.
Coverage C, Medical Coverage, covers medical expenses incurred by injured parties.
Any damages, settlements and/or medical expenses your insurer pays on your behalf are part of indemnity coverage. These payments are subject to limits described in your policy.
Supplementary Payment (Defense) Coverage
Supplementary Payments covers the cost of investigating any claims and defending any lawsuits insured under Coverages A or B. (Coverage C applies to medical expenses, not lawsuits, so no defense is applicable.) For example, suppose that you operate a restaurant. Jim, a customer, files a bodily injury claim against your company. He alleges that a sandwich he ate at your restaurant made him sick. Jim sends you a letter demanding $15,000. You send the demand to your insurer.
Your insurer investigates the claim to determine whether it is valid. If Jim ultimately files a lawsuit against your company, your insurer will provide an attorney to defend you. The expenses the insurer incurs in conducting the investigation and defending you against Jim's suit are covered under Supplementary Payments.
Like most general liability policies, the ISO form covers defense expenses outside the policy limit. This means that defense costs do not reduce your limits.
Costs Included in Supplementary Payments
Supplementary Payments coverage includes attorneys fees, court costs, premiums on some bonds, and interest charged on judgments paid to third parties. These costs are covered only in connection with claims the insurer investigates or settles, or suits it defends.
Under the standard ISO liability policy, Supplementary Payments coverage includes the following seven categories of expenses. If your policy is written on an insurer's proprietary policy form, the expenses covered are likely similar, but not necessarily identical, to those outlined below.
The policy provides unlimited coverage for the cost of defending you or another insured against a covered lawsuit. The attorney assigned to your case may be employed by the insurer or by an independent law firm.
Your insurer will pay up to $250 for the cost of bail bonds required because of an accident or traffic law violation arising out of the use of a vehicle that is covered for bodily injury. Within the context of a general liability policy, "vehicle" means mobile equipment. Liability policies exclude accidents arising from the use of autos.
For example, suppose that one of your employees is arrested by a police officer for leaving the scene of a traffic accident that caused injury to a pedestrian. The accident occurred while the employee was driving a piece of farm machinery. Your policy will pay up to $250 toward the cost of a bail bond purchased on behalf of the employee.
The purpose of an attachment bond is best explained by an example. Suppose that a customer has filed a lawsuit against your company. It appears that the plaintiff will win a judgment against you. However, the plaintiff suspects that you might skip town (or do something else) to avoid paying the damages. Thus, he asks the court to attach (seize) some property belonging to you. If you fail to pay the damages, the court may sell the property in order to compensate the plaintiff.
You can have the property released by purchasing an attachment bond. The bond guarantees that the judgment against you will be paid. Your policy will pay the cost of an attachment bond if the bond amount is within the applicable limit of insurance.
Your insurer will pay "reasonable" costs you incur to assist in its investigation of a claim or suit. For instance, the insurer may require you to attend a deposition during normal work hours. The insurer will pay the costs you incur (transportation, parking etc.) to comply. It will also pay up to $250 a day for loss of earnings because of time you take off from work.
Your insurer will pay various court costs that may be charged to you if the plaintiff wins the lawsuit. Examples are a suit filing fee, the cost of court transcripts, the cost of copying documents, and charges for subpoenas served on witnesses.
If the plaintiff wins the case and you are required to pay all or part of his or her attorney’s fees, those fees are considered damages, not Supplementary Payments. That is, the plaintiff's attorney's fees (not your attorney's fees) qualify as damages.
Prejudgment interest is designed to compensate the plaintiff for the injury or damage he or she suffers between the time the injury or damage occurs and the time the judgment is awarded by a court. State law determines how this interest is calculated. The insurer will pay interest only on the portion of the judgment it pays (if your insurer is sharing the judgment with another insurer.)
Post-judgment interest compensates the plaintiff for the injury or damage suffered from the time the court issues a judgment until the judgment is actually paid. Post-judgment interest is paid on the full amount of the judgment. It is calculated in accordance with state law.
When Coverage Ceases
Your insurer is obligated to pay for defense and other court costs until the applicable limit of liability has been used up in the payment of a settlement or judgment. For example, suppose your policy includes a $100,000 limit for Damage to Premises Rented to You. A fire breaks out in a building you rent, causing severe damage. Your landlord sues you for property damage and demands $150,000 in compensatory damages. Your landlord refuses a $100,000 settlement offer. Your insurer eventually pays the $100,000 limit.
Your policy covers the costs related to your defense until the $100,000 payment has been made. Once your limit has been exhausted, your defense coverage for the fire damage claim ceases.