What are Supplementary Payments?
Supplementary Payments Aren't Subject to the Policy Limits
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.
What Are Supplementary Payments?
Supplementary Payments include costs the insurer incurs to investigate claims and defend suits against the insured under Coverage A (Bodily Injury and Property Damage Liability) or Coverage B (Personal and Advertising Injury Liability). For example, suppose you operate a restaurant. Jim, a customer, 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.
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.
Costs Included in Supplementary Payments
The Supplementary Payments section of the standard ISO liability policy includes the seven categories of expenses outlined below. Policies written on non-standard (insurers') forms generally afford very similar, but not necessarily identical, coverage as the ISO form.
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.
Note that 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.
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.
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 he asks 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.
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.
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 it 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 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.