10.3 Who Is an Insured and Supplementary Payments
Key Takeaways
- Who Is an Insured depends on the named insured's business form: sole proprietors include the spouse; partnerships include partners and spouses; LLCs include members and managers; corporations include officers, directors, and stockholders; trusts include trustees.
- Employees and volunteer workers are insureds within the scope of duties but are not covered for injury to fellow employees, the named insured, or care-custody property.
- Newly acquired/formed organizations (not partnerships, JVs, or LLCs) are automatically insureds for up to 90 days or end of policy period, with no pre-acquisition products-completed ops coverage.
- Separation of insureds applies the policy to each insured separately, but all insureds still share the single set of limits.
- Supplementary Payments (defense costs, $250 bail bonds, $250/day lost earnings, court costs, pre/post-judgment interest) are paid in addition to the limits; the CGL is NOT a defense-within-limits form.
Section II - Who Is an Insured
The CGL's 'Who Is an Insured' provision (Section II) determines exactly which persons and entities receive coverage, and the answer depends on the named insured's form of business shown in the Declarations. This is heavily tested because coverage for an individual employee, spouse, or new entity is not automatic - it follows the named insured's legal structure.
| Named insured type | Who else is an insured |
|---|---|
| Individual (sole proprietor) | The named insured and the spouse, but only for the conduct of the business |
| Partnership / joint venture | The partners/members and their spouses, only for business conduct |
| LLC | The members (re: business conduct) and managers (re: their duties) |
| Corporation / other org | Executive officers and directors (re: their duties) and stockholders (re: liability as stockholders) |
| Trust | The trustees, but only re: trust duties |
Employees, volunteers, and newly acquired entities
Beyond the owners, the CGL automatically makes certain others insureds:
- Employees and volunteer workers are insureds for acts within the scope of employment or duties. BUT they are NOT covered for (a) bodily injury to a fellow employee or volunteer, (b) bodily injury to the named insured, partners, or members, or (c) property damage to property owned, occupied, used by, or in the care of the employee/volunteer.
- Real estate managers acting for the named insured (a person or organization) are insureds.
- A person/organization having temporary custody of a deceased insured's property is an insured re: that property.
- Newly acquired or formed organizations (other than partnerships, JVs, or LLCs) are automatically insureds for up to 90 days or the end of the policy period, whichever is earlier - and there is no products-completed operations coverage for work done before acquisition. This 90-day window is a classic exam number.
Separation of insureds
Under the separation of insureds condition, except for the limits of insurance and the duties-in-event-of-occurrence condition, the coverage applies as if each insured were the only insured and separately to each insured against whom a claim is made. This is why one insured can sometimes have coverage even when another insured's conduct is excluded. It does not, however, increase the limits - all insureds still share the single set of limits shown in the Declarations.
Supplementary Payments - Coverages A and B
Supplementary Payments are amounts the insurer pays in addition to the applicable limit of insurance when it defends or investigates a claim. Because they are outside the limits, they do not erode the policy limits available to pay a judgment. The standard CG 00 01 list:
- All expenses the insurer incurs (investigation, defense costs - the duty to defend is in addition to limits)
- Up to $250 for the cost of bail bonds required because of accidents or traffic-law violations arising out of a covered vehicle's use (the insurer is not obligated to furnish the bond)
- The cost of bonds to release attachments, but only for bond amounts within the applicable limit
- Reasonable expenses incurred by the insured at the insurer's request to assist the investigation/defense, including up to $250 a day for lost earnings
- All court costs taxed against the insured (not pre/post-judgment attorney fees as costs)
- Pre-judgment interest awarded against the insured on the part of the judgment the insurer pays
- All post-judgment interest that accrues after entry of the judgment and before the insurer pays/offers/deposits its share
Defense costs outside the limits - worked example
The single most-tested feature: in the standard CGL, defense costs are paid in addition to the limits and the insurer's duty to defend ends when the applicable limit is exhausted by payment of judgments or settlements.
Example: A covered claim with a $1,000,000 each-occurrence limit settles for the full $1,000,000. The insurer also spent $180,000 defending the case and paid $12,000 in post-judgment interest.
- Indemnity paid (counts against limit): $1,000,000 - fully exhausts the each-occurrence limit.
- Defense costs of $180,000 are a Supplementary Payment - paid in addition, so the insurer's total outlay is $1,180,000 plus interest.
- Post-judgment interest of $12,000 is also a Supplementary Payment, in addition to limits: total outlay $1,192,000.
Contrast with a defense-within-limits ('eroding' or 'wasting') provision found on many professional liability and claims-made forms, where defense costs reduce the limit available to pay damages - the CGL is the opposite.
Duty to defend vs. duty to indemnify
The CGL imposes two distinct obligations, and exam questions test the difference. The duty to defend is broader than the duty to indemnify: the insurer must defend any suit seeking covered damages even if the allegations are groundless, false, or fraudulent, and even if some counts are not covered. The duty arises from the allegations in the complaint compared to the policy, not from the ultimate facts.
The duty to indemnify is the obligation to actually pay damages, and it applies only to amounts within coverage and within the limits. Because the duty to defend is triggered by potential coverage, an insurer may have to defend a suit it ultimately does not have to pay.
Key timing rule: the insurer's right and duty to defend end when the applicable limit of insurance has been exhausted by payment of judgments or settlements under Coverage A or B. Once limits are exhausted, supplementary defense payments stop. This is why higher limits buy not just more indemnity but a longer-lasting defense obligation - a frequently tested practical point that distinguishes the CGL from wasting-limit professional forms.
A newly acquired organization (not a partnership, JV, or LLC) is automatically an insured under the CGL for how long?
A covered claim settles for the full $1,000,000 each-occurrence limit, and the insurer separately spent $180,000 on defense. Under the standard ISO CGL, how are the defense costs treated?