10.3 Who Is an Insured and Supplementary Payments

Section II - Who Is an Insured

The CGL automatically extends coverage to a range of persons and organizations beyond the named insured shown in the declarations. Who qualifies depends on the named insured's business form, which is identified in the declarations. The exam tests these categories closely because automatic-insured status varies by entity type.

Automatic insureds by business form

In all forms, employees are insureds for acts within the scope of employment - but not for bodily injury to a co-employee or to the named insured, and not for professional services. Volunteer workers are also insureds for assigned duties. The distinction between an individual (sole proprietor) and a corporation is a favorite exam point: for a sole proprietor, the named insured's spouse is automatically an insured for the business, whereas a corporation's coverage extends to its executive officers, directors, and stockholders acting within their corporate roles, not their personal affairs.

Other automatic insureds and newly acquired entities

• Real estate managers acting for the named insured are insureds (a person or organization managing property).
• The person or organization having temporary custody of property of a deceased insured is an insured until a legal representative is appointed.
• A legal representative (e.g., executor) of a deceased named insured is an insured.
• Newly acquired or formed organizations (other than partnerships, joint ventures, or LLCs) are automatically insureds for up to 90 days or the end of the policy period, whichever is earlier - but there is no coverage for injury/damage before acquisition, and no products-completed operations coverage for past products.

Trap: newly acquired partnerships, joint ventures, and LLCs are excluded from the automatic 90-day extension - they must be specifically added.

Supplementary Payments - Coverages A and B

Supplementary Payments are amounts the insurer pays in addition to the applicable limit of insurance when it defends a covered suit. Because they do not erode the limit, they protect the insured's full policy limit for the actual damages. The exam frequently asks whether a particular cost is a supplementary payment.

Supplementary payments apply only to claims the insurer is defending under Coverage A or Coverage B. They reflect the principle that the insurer's defense and litigation-management costs are its own business expense, distinct from the indemnity it owes the claimant, so the insured's purchased limit is reserved for actual damages.

The supplementary payments list

The insurer will pay, with respect to a covered claim it defends:

• All expenses the insurer incurs (investigation/defense costs).
• Up to $250 for the cost of bail bonds required because of an accident or traffic-law violation arising out of a covered vehicle (no obligation 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, including up to $250 per day for loss of earnings (for time off work to assist the defense).
• All court costs taxed against the insured (but NOT attorney's fees taxed as costs).
• Pre-judgment interest awarded against the insured on the part of the judgment the insurer pays.
• Post-judgment interest that accrues after entry of judgment and before the insurer pays/tenders its limit.

Worked example: supplementary payments preserve the limit

The insured has a $1,000,000 Each Occurrence limit. A covered suit results in:

• A jury award of $1,000,000 in damages,
• $60,000 in defense/investigation costs,
• $8,000 in court costs taxed against the insured,
• $15,000 in pre-judgment interest on the covered judgment,
• A $200 bail bond.

Because defense, court costs, interest, and the bail bond are supplementary payments paid in addition to the limit, the insurer pays the full $1,000,000 damages plus the $60,000 + $8,000 + $15,000 + $200 = $83,200 supplementary, for a total of $1,083,200. The damages limit is not reduced by the supplementary amounts.

Trap: post-judgment interest stops accruing once the insurer pays or tenders its limit - it is not open-ended.

Distinguishing supplementary payments from indemnity

A recurring exam theme is separating supplementary payments (defense-side costs paid in addition to the limit) from damages (indemnity that erodes the limit). Memorize the dollar caps - they are favorite test points:

• Bail bonds: up to $250 (insurer is not obligated to furnish or apply for the bond).
• Lost earnings of the insured assisting the defense: up to $250 per day.
• Bonds to release attachments: only up to the applicable limit of insurance.

The insurer's defense obligation ends when it has used up the applicable limit of insurance paying judgments or settlements. Once the limit is exhausted, the duty to defend ceases and supplementary payments stop. This is why a small per-occurrence limit can leave the insured exposed once the limit is consumed mid-litigation.