10.3 Who Is an Insured and Supplementary Payments
Key Takeaways
- Section II - Who Is an Insured automatically extends coverage by business form: spouses for individuals/partnerships, members/managers for LLCs, and officers/directors/stockholders for corporations.
- Employees and volunteer workers are insureds for acts within their duties, but not for injury to co-employees, the named insured, or property the named insured controls.
- Newly acquired or formed organizations (over 50% ownership) get automatic coverage for only 90 days or the policy period, whichever is first.
- Supplementary Payments are paid IN ADDITION to the limit and never erode it — they include defense costs, a $250 bail bond, release-of-attachment bonds, a $250/day loss-of-earnings allowance, taxed court costs, and pre/post-judgment interest.
- Because defense is provided outside the limits, an insurer can pay a judgment equal to the full limit AND still owe defense costs and interest on top.
Section II: Who Is an Insured
The CGL's Section II - Who Is an Insured automatically extends coverage beyond the named insured shown in the Declarations. Who qualifies depends on the business form of the named insured. This section is heavily tested because candidates must know who is covered without a separate endorsement.
Insured Status by Business Form
| Named Insured Type | Also Automatically Insured |
|---|---|
| Individual (sole proprietor) | The individual and the spouse, but only for the conduct of the named business |
| Partnership / Joint Venture | Partners/members and their spouses, only for business conduct |
| LLC | Members (re: business) and managers (re: their duties) |
| Corporation | Executive officers and directors (re: their duties) and stockholders (re: liability as stockholders) |
Across all forms, employees and volunteer workers are insureds for acts within the scope of employment/duties — but not for BI to a co-employee, BI to the named insured, or PD to property the named insured owns or controls.
Other Automatic and Newly Acquired Insureds
- Newly acquired or formed organizations are automatically covered for up to 90 days (or end of policy period, whichever is first), provided the named insured owns more than 50% — but not for occurrences before acquisition and not if other similar insurance applies.
- Real estate managers (a person or organization managing property for the named insured) are insureds.
- A legal representative is an insured if the named insured dies, but only for duties as such and only over property within the representative's custody.
Trap: a newly acquired company gets only 90 days of automatic coverage; after that an endorsement is required.
Supplementary Payments
Supplementary Payments are amounts the insurer pays in addition to the applicable limit of insurance — they do not reduce the Each Occurrence Limit, the General Aggregate, or any other limit. They apply to claims or suits the insurer defends. This "on top of the limit" feature is one of the most-tested CGL facts.
What Supplementary Payments Cover
Under Coverages A and B, the insurer will pay, with respect to a claim it investigates/settles or a suit it defends:
- All expenses the insurer incurs (defense costs, investigation).
- The cost of bail bonds up to $250 (the insurer is not obligated to furnish them).
- The cost of bonds to release attachments within the applicable limit.
- All reasonable expenses the insured incurs at the insurer's request, including up to $250 a day for loss of earnings for time off work.
- All court costs taxed against the insured (excluding post-judgment attorney fees and post-judgment interest).
- Pre-judgment interest on the part of the judgment the insurer pays, and all post-judgment interest on the full judgment until the insurer pays/deposits its limit.
Worked Example: Limit Plus Supplementary Payments
The insured carries a $500,000 Each Occurrence Limit. A covered suit results in a $500,000 judgment, exhausting the limit. During the defense, the insurer also incurred $60,000 in attorney fees, posted a $250 bail bond, and paid $8,000 in court costs and post-judgment interest.
Because defense costs, bonds, and interest are Supplementary Payments, the insurer pays the full $500,000 judgment PLUS the $60,000 + $250 + $8,000 = $68,250 on top — a total outlay of $568,250. None of the supplementary amounts erode the $500,000 limit. This is why defense is described as being provided outside the limits in the CGL.
A corporation is the named insured on a CGL policy. Which party is automatically an insured under Section II WITHOUT an endorsement?
Why are Supplementary Payments significant when a judgment equals the policy's Each Occurrence Limit?
Who Is an Insured — by Business Form — and the Supplementary Payments
Section II's "Who Is an Insured" definition turns on the named insured's business structure, a distinction the exam tests directly:
| Named insured type | Automatic insureds |
|---|---|
| Sole proprietor | The individual and spouse, for the business |
| Partnership / joint venture | Partners/members and their spouses, for the business |
| LLC | Members (as to conduct of business) and managers (as to duties) |
| Corporation | Executive officers, directors, and stockholders (as to their duties) |
| All | Employees and volunteers for acts within the scope of duties; newly acquired/formed entities for 90 days |
Trap: Employees are insureds for work-related acts but not for bodily injury to a co-employee or to the named insured, and not for damage to property the employer owns or controls.
Supplementary Payments are paid in addition to the limit: all defense costs, up to $250 for bail bonds, premiums on appeal/attachment bonds, post-judgment interest, reasonable expenses the insured incurs at the insurer's request (up to $250/day for lost earnings), and court costs taxed against the insured. Because they are outside the limit, a costly defense does not reduce the money available to claimants.
Newly Acquired Entities, Vendors, and the Limits Interaction
Beyond the structure-based insureds, the CGL automatically extends to newly acquired or formed organizations the named insured controls, but only for 90 days (or to policy end, whichever is first) and not if another policy covers them or for injury before acquisition. Real estate managers, the named insured's legal representative after death, and temporary custodians of property can also qualify. Vendors are commonly added by the CG 20 15 endorsement for products the named insured distributes through them, and additional insureds (landlords, lessors, contracting parties) are added by the CG 20 series.
Worked supplementary-payments example: A CGL has a $1,000,000 each-occurrence limit. A covered suit results in a $1,000,000 judgment, the insurer spends $180,000 defending it, and $40,000 in post-judgment interest accrues. Because defense costs and post-judgment interest are Supplementary Payments paid in addition to the limit, the insurer pays the full $1,000,000 judgment plus the $180,000 defense plus the $40,000 interest — a total of $1,220,000 — and the limit is not eroded by the defense. Recognizing that defense and the listed supplementary payments sit outside the limit is the precise point most "how much does the insurer pay in total" questions test.