Who Is an Insured and Supplementary Payments
Key Takeaways
- Who Is An Insured depends on the named insured's business form: sole proprietor, partnership, LLC, or corporation, each with its own automatic insureds.
- Employees and volunteers are insureds for work-scope acts but not for injuring fellow employees or the named insured.
- Newly acquired or formed organizations get up to 90 days of automatic coverage, excluding products-completed operations.
- Supplementary Payments are paid in addition to the limit and do not erode it.
- Supplementary Payments include defense expenses, court costs, bail bonds up to $250, $250/day lost earnings, and pre- and post-judgment interest.
Who Is an Insured
The Who Is An Insured section of CG 00 01 determines who receives protection - a frequent exam topic. Coverage depends on the named insured's business form shown on the declarations.
| Named insured form | Automatic insureds |
|---|---|
| Individual / sole proprietor | The individual and their spouse, for business conduct |
| Partnership / joint venture | The partnership and its members, partners, and their spouses, for business conduct |
| LLC | The LLC, plus its members (as owners) and managers (as managers) |
| Corporation | The corporation, plus its executive officers and directors (acting in that role) and stockholders (for liability as stockholders) |
Other automatic insureds
- Employees and volunteer workers are insureds for acts within the scope of employment or duties - but not for injury to a fellow employee, to the named insured, or for damage to property the named insured owns or controls.
- Newly acquired or formed organizations are covered automatically for up to 90 days (or end of the policy period, whichever is first), provided the named insured maintains majority ownership and no other insurance applies.
- Real estate managers acting for the named insured.
Trap: the 90-day automatic coverage for new entities does not apply to products-completed operations or to coverage that should have existed before acquisition. Tell candidates: report new acquisitions promptly.
Why supplementary payments matter on the exam
Supplementary payments are the reason the CGL is described as having non-eroding (non-wasting) defense: defense costs, court costs, bonds, and interest are paid in addition to the limit, so a $1,000,000 limit can produce well over $1,000,000 of total insurer outlay. Contrast this with most claims-made professional liability forms, where defense is inside the limit (wasting/eroding), so every dollar of defense reduces the money left to pay a judgment. Candidates must flag which structure a question describes, because the math changes entirely.
The "in addition to" worked illustration revisited
If the insurer pays a $1,000,000 judgment up to a $1,000,000 limit, then incurs $150,000 defense, $5,000 court costs, and a $250 bail bond, its total is $1,155,250 even though the limit was "only" $1,000,000. But note the limits within supplementary payments: bail bonds are capped at $250, the lost-earnings reimbursement at $250 per day, and the insurer's duty to provide a bond does not require it to actually furnish one. Examiners test whether candidates know these small caps.
Insured status and the named-insured business form
Who counts as an insured depends on the business form on the declarations - sole proprietor, partnership, LLC, or corporation - and employees and volunteers are insureds only within the scope of their duties. The fellow-employee exclusion (one employee cannot use the policy to sue a co-worker) and the 90-day automatic coverage for newly acquired or formed organizations are the two most-tested wrinkles. A typical trap: an employee injures a coworker on the job - that is a workers compensation matter, not a CGL claim, because of the employee-injury and fellow-employee exclusions.
Newly acquired organizations and the reporting duty
The 90-day automatic coverage for newly acquired or formed organizations is a precise, tested rule. A new entity the named insured majority-owns is automatically an insured for up to 90 days or the end of the policy period, whichever is first, but the automatic coverage does not extend to products-completed operations and does not pick up liability that should have been insured before the acquisition. The practical lesson producers teach: report acquisitions promptly and add them by endorsement, because relying on the 90-day grace period leaves the products exposure and any pre-acquisition liability uninsured.
A corporation's CGL lists the company as the named insured. An executive officer is sued for a wrongful act committed while performing company duties. Is the officer an insured?
Supplementary Payments
Supplementary Payments are amounts the insurer pays in addition to the applicable limit of insurance once it defends or investigates a claim. Because they are paid on top of the limit, they do not reduce the Each Occurrence limit or the aggregate (a common exam point).
The CGL supplementary payments include:
- All expenses the insurer incurs (investigation, attorney fees the insurer hires).
- Cost of bail bonds up to $250 for accidents related to covered vehicle use (the insurer need not furnish the bond).
- Cost of bonds to release attachments up to the applicable limit.
- Reasonable expenses the insured incurs at the insurer's request, including up to $250 per day for lost earnings.
- All court costs taxed against the insured.
- Pre-judgment interest awarded against the insured, and post-judgment interest on the full judgment until the insurer pays its share.
Worked example
An insured with a $1,000,000 Each Occurrence limit is sued; the jury awards $1,000,000 in damages. The insurer also incurs $120,000 in defense costs, $4,000 in court costs, and $9,000 in post-judgment interest.
Because supplementary payments are outside the limit, the insurer's total outlay is:
| Item | Amount |
|---|---|
| Damages (paid up to limit) | $1,000,000 |
| Defense costs (supplementary) | $120,000 |
| Court costs (supplementary) | $4,000 |
| Post-judgment interest (supplementary) | $9,000 |
| Total insurer outlay | $1,133,000 |
Trap: candidates often assume defense "eats" the limit. On the standard CGL it does not - that is why CGL limits are called non-eroding for defense, unlike many claims-made professional liability forms where defense is inside the limit (eroding/wasting limits).
Under a standard CGL, how do Supplementary Payments such as defense costs and court costs affect the limit of insurance?