10.3 Who Is an Insured and Supplementary Payments

Who Is an Insured (Section II)

Section II of CG 00 01 defines who is an insured automatically, even when no individual is named on the declarations. The status depends on the named insured's business form shown in the declarations. This matters because the form grants the right people coverage without endorsement and just as importantly limits each to acts within the scope of the business - personal, non-business conduct is never covered.

Automatic insured status by business form:

• Individual (sole proprietor): the named insured and the spouse, but only for the conduct of the business.
• Partnership or joint venture: the named insured, plus partners/members and their spouses, only for business conduct.
• Limited liability company (LLC): the named insured, its members (only for business conduct) and its managers (only for their duties as managers).
• Organization other than partnership/JV/LLC (corporation): the named insured, plus executive officers and directors (only for their duties) and stockholders (only for liability as stockholders).
• Trust: the named insured and its trustees (only for trust duties).

Automatic Insureds: Employees, Volunteers, and Newly Acquired Entities

Beyond the owners, Section II automatically extends insured status to:

• Employees and volunteer workers - covered for acts within the scope of employment or duties.

Trap: employees are not insured for (1) BI/PD to a fellow employee or to the named insured, (2) injury to the employee's spouse/family arising from such injury, or (3) professional health-care services (other than first aid by non-medical staff).

• Real estate managers acting for the named insured.
• A temporary custodian of property of a deceased named insured (until a legal representative is appointed).
• Newly acquired or formed organizations - covered automatically as named insureds, but only until 90 days after acquisition or the end of the policy period, whichever is first, and not for prior-period events or if another similar policy applies.

Worked Example: The 90-Day Rule

A corporation with a CGL policy running January 1-December 31 acquires a new subsidiary on November 15. The newly acquired organization is automatically an insured. Counting forward, 90 days would reach roughly February 13 of the next year - but the policy period ends December 31, which comes first. Therefore automatic coverage stops on December 31, the earlier of the two dates.

The lesson tested: when the 90-day window would extend past expiration, the policy-period end date controls. The producer must endorse the new entity onto the renewal (or a new policy) to continue coverage. The rule also does not cover BI/PD that occurred before the named insured acquired the entity, so claims rooted in pre-acquisition operations remain uncovered.

Supplementary Payments (Coverages A and B)

Supplementary Payments are amounts the insurer pays in addition to the Limits of Insurance - they do not erode the each-occurrence limit or the aggregate. This is one of the single most-tested CGL facts. They apply only to a claim or suit the insurer defends. The standard list:

Supplementary Payments Traps

Two numeric values are pure memorization: bail bonds up to $250 and loss of earnings up to $250 per day. Candidates routinely confuse these or invent a higher bail figure.

The interest rules reward careful reading:

• Pre-judgment interest is paid only on the portion of the judgment the insurer actually pays - so if a verdict exceeds the limit, pre-judgment interest is prorated.
• Post-judgment interest accrues on the entire judgment but only until the insurer pays, offers, or deposits its applicable limit. Once the insurer tenders the limit, its obligation for further interest stops.

Because supplementary payments are paid outside the limits, a $1,000,000 each-occurrence policy can pay the full $1,000,000 judgment plus defense costs, court costs, and interest on top - a key reason CGL defense is described as being "outside the limits" (contrast with many professional-liability forms where defense erodes the limit).

When the Duty to Defend Ends

The insurer's duty to defend is broader than its duty to pay: it must defend any suit seeking covered damages even if the allegations are groundless, false, or fraudulent. But that duty is not unlimited. The form states the insurer's right and duty to defend ends when it has used up the applicable limit of insurance in paying judgments or settlements. Once the each-occurrence or aggregate limit is exhausted, the insurer may walk away from the defense.

This is why supplementary payments and defense being outside the limit is so valuable to the insured: those dollars are spent defending the claim without drawing down the limit, so the limit survives longer to pay damages. Candidates should be able to explain that defense costs do not erode CGL limits, while post-judgment interest stops once the insurer tenders its limit into court.

Worked Example: Judgment Plus Supplementary Payments

Assume a $500,000 each-occurrence limit. A covered suit results in a $500,000 jury verdict. During the litigation the insurer incurs $80,000 in defense and investigation costs, $6,000 in court costs taxed against the insured, and $12,000 in pre-judgment interest on the paid portion.

The insurer pays the $500,000 judgment up to the limit, then pays the $80,000 + $6,000 + $12,000 = $98,000 in supplementary payments in addition to the limit. Total outlay is $598,000. If instead defense costs eroded the limit (as on a professional-liability "defense-within-limits" form), the insured would receive only $420,000 of indemnity. This contrast is a favorite exam comparison.