10.3 Who Is an Insured and Supplementary Payments

Section II - Who Is an Insured

The CGL's Section II determines exactly which persons and organizations enjoy the policy's protection. The answer depends on the form of the named insured's business, because the policy automatically extends to certain related parties based on entity type. This is a heavily tested area: examiners want to confirm you can identify covered persons without an endorsement.

Automatic Insureds by Business Form

Employees and Volunteer Workers as Insureds

The CGL also makes the named insured's employees and volunteer workers insureds, but only for acts within the scope of their employment or duties. There are important carve-outs: employees and volunteer workers are NOT insured for:

• Bodily injury or personal/advertising injury to a co-employee or fellow volunteer while in the course of employment.
• Bodily injury to the named insured, partners, or members.
• Property damage to property owned, occupied, used, rented, or in the care/custody/control of that employee, co-employee, or the employer.
• Professional health care services they render (unless the named insured is in that business).

Newly Acquired or Formed Organizations

A frequently tested provision: any organization the named insured newly acquires or forms (other than a partnership, joint venture, or LLC) qualifies as a named insured, but coverage is automatic only for 90 days or until the end of the policy period, whichever is earlier. After 90 days the new entity must be added by endorsement. Also note: no person or organization is an insured for the conduct of a current or past partnership, joint venture, or LLC that is not shown as a named insured in the Declarations.

Who Is an Insured, by Business Form

CGL Section II automatically makes insureds based on the named insured's legal form: for a sole proprietor, the individual and spouse (business only); for a partnership/joint venture, the partners and their spouses; for an LLC, members and managers; for a corporation, executive officers and directors (acting within duties) plus stockholders (liability as such).

Employees and volunteer workers are insureds for acts within the scope of employment except for bodily injury to a co-employee or to the named insured. Newly acquired or formed organizations are automatically insured for 90 days (or end of policy period, whichever is first) if the named insured owns more than 50%.

Supplementary Payments — Paid On Top of the Limit

Supplementary payments are in addition to the limit and include: all defense costs; up to $250 for bail bonds; the cost of bonds to release attachments within the limit; reasonable expenses the insured incurs at the insurer's request, including up to $250/day for loss of earnings; court costs taxed against the insured; pre- and post-judgment interest; and the insurer's other litigation expenses. The two $250 figures (bail bonds and daily earnings) are tested verbatim, and the key concept is that a $1,000,000 occurrence limit can be accompanied by far larger uncapped defense spending.

Supplementary Payments - Coverages A and B

The Supplementary Payments provision pays certain costs in addition to the Limits of Insurance for claims or suits the insurer defends. Because these payments do not erode the limit, they are valuable to the insured and a favorite exam topic. The insurer pays them only with respect to a claim it defends.

What Supplementary Payments Cover

• All expenses the insurer incurs in defending the suit.
• Up to $250 for the cost of bail bonds required because of an accident or traffic-law violation 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 of insurance.
• All reasonable expenses incurred by the insured at the insurer's request to help investigate or defend the claim, including up to $250 per day for loss of earnings because of time off from work.
• All court costs taxed against the insured in the suit (but not attorney fees taxed against the insured in some jurisdictions, per case law).
• Prejudgment interest awarded against the insured on that part of the judgment the insurer pays.
• All interest on the full amount of any judgment that accrues after entry of the judgment and before the insurer pays or tenders its share (postjudgment interest).

Memorize the Two $250 Figures

The two $250 figures - bail bonds and per-day loss of earnings - are classic memorization items. Note bail bonds are a flat $250 total, while loss of earnings is $250 per day.

Worked Example - Supplementary Payments Stack on Top of Limits

An insured with a $1,000,000 Each Occurrence Limit is sued. The insurer settles the judgment for the full $1,000,000, pays $80,000 in defense expenses, $1,500 in court costs taxed against the insured, $6,000 in postjudgment interest, and $250 for a bail bond. Because supplementary payments and defense are in addition to the limit, the insurer's total outlay is $1,000,000 + $80,000 + $1,500 + $6,000 + $250 = $1,087,750, yet only the $1,000,000 indemnity counts against the Each Occurrence Limit and aggregate.