Supplementary payments are special payments made by insurers to those who are insured by the company. These payments often stem from legal issues, such as costs associated with investigating claims and defending suits against the insured.
Review the full definition of supplementary payments and some examples of common costs that fall under this category.
What Are Supplementary Payments?
One of the broad duties imposed on insurers under the standard general liability policy is the duty to defend. The insurer is obligated to defend (or pay the cost of defending) the insured against lawsuits covered by the policy. The costs the insurer will pay are described in a section entitled "supplementary payments." These sections can be found in many types of insurance coverage, including Coverage A (bodily injury and property damage liability) and Coverage B (personal and advertising injury liability).
Supplementary payments are covered only in connection with claims the insurer investigates or settles, or suits it defends. Your policy won't cover investigation or defense costs you incur on your own without your insurer's approval. For instance, if you hire your own attorney to defend you against a claim, your insurer won't reimburse you for the lawyer's fees.
Most general liability policies cover defense expenses outside the policy limit. This means that defense costs don't reduce your limits.
How Do Supplementary Payments Work?
For example, suppose you operate a restaurant. A customer named Jim claims that a sandwich he ate at your restaurant made him sick. He demands $15,000 as compensation for the bodily injury he allegedly suffered. You forward his 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.
Costs Included in Supplementary Payments
The supplementary payments section of the standard ISO liability policy includes the seven categories of expenses outlined below. Policies on non-standard forms generally afford similar, but not necessarily identical, coverage as the ISO form.
Insurer's expenses: The policy provides unlimited coverage for fees charged by an attorney to defend you or another insured against a covered lawsuit. The attorney may be employed by the insurer or an independent law firm.
If the plaintiff in a lawsuit wins the case against you and the court requires you to pay all or part of the plaintiff's attorney’s fees, those fees are considered damages rather than supplementary payments. Because they are treated as damages, the plaintiff's attorney's fees are subject to the policy limit.
Bail bonds: 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 covered for bodily injury. Within the context of a general liability policy, "vehicle" means mobile equipment (not autos).
For example, suppose that an employee is charged with 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.
Attachment bond: The purpose of an attachment bond is best explained by an example. Suppose a customer has filed a lawsuit against your company and it appears the plaintiff will win a judgment against you. The plaintiff suspects that you might take steps (such as leaving town) to avoid paying the damages so they ask the court to attach (seize) property that belongs to you. If you fail to pay the damages, the court may sell the property in order to compensate the plaintiff.
You can purchase an attachment bond to have the property released. The bond guarantees that the judgment against you will be paid. The cost of the bond is covered by your policy as long as the bond amount is within the applicable limit of insurance.
Investigation expenses: 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.
Court costs: 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.
Prejudgment interest: Prejudgment interest is designed to compensate the plaintiff for the injury or damage they suffer 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 it is sharing the judgment with another insurer.)
Post-judgment interest: 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 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 $150,000 in property damage but eventually accepts your insurer's $100,000 settlement offer. 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.
- Supplemental payments are special payments an insurer makes to an insured individual.
- These payments are usually related to miscellaneous costs related to legal issues.
- Supplemental payments only apply to legal costs that an insurer has specifically approved—if an insured individual pursues legal action on their own then those costs won't be covered by supplemental payments.