10.3 Who Is an Insured and Supplementary Payments
Key Takeaways
- Who Is an Insured depends on the named insured's business form: spouses (individual/partnership), members and managers (LLC), and executive officers, directors, and stockholders (corporation), each only within their duties.
- Employees and volunteer workers are insureds for acts within their duties but not for injury to co-employees, the named insured, or damage to the employer's property.
- Newly acquired or formed organizations get automatic coverage only if the named insured owns more than 50%, and only for 90 days or until policy expiration, whichever is earlier.
- Supplementary Payments - defense costs, $250 bail bonds, bonds to release attachments, $250/day lost earnings, court costs, and pre-/post-judgment interest - are paid in ADDITION to the limit and do not erode it.
- The insurer's duty to defend and its obligation for post-judgment interest end once it pays or tenders the applicable limit of insurance.
Section II - Who Is an Insured
The CGL's Section II automatically defines who is protected based on the named insured's form of business shown in the declarations. Candidates must know that coverage extends beyond the named insured to specified persons, but only within the scope of their duties for the organization.
| Named insured type | Who else is automatically an insured |
|---|---|
| Individual (sole proprietor) | The individual and his/her spouse, but only for the conduct of the named business |
| Partnership / joint venture | The partners/members and their spouses, for business of the partnership |
| Limited liability company (LLC) | The members (regarding LLC business) and the managers (regarding their duties as managers) |
| Corporation / other organization | Executive officers and directors (for their duties) and stockholders (for liability as stockholders) |
Employees and volunteer workers are automatically insureds for acts within the scope of their employment or duties - but not for BI to a co-employee, BI to the named insured, professional health-care services (unless added), or damage to the employer's property.
A few additional automatic insureds round out Section II. Any person driving mobile equipment registered to the named insured on a public road is an insured. The named insured's real estate manager (a person or organization managing property for the insured) is an insured. And on the named insured's death, a legal representative acquires the rights and duties of the named insured but is an insured only with respect to that representative's duties. Note that none of these grants extends coverage to a person beyond the scope of the duties the form describes.
Newly Acquired or Formed Organizations
The CGL automatically extends to organizations the named insured newly acquires or forms during the policy period, but with three important limits the exam tests:
- The named insured must own more than 50% of the new organization.
- Coverage lasts only 90 days or until the end of the policy period, whichever is earlier, unless the entity is scheduled by endorsement.
- It does not apply to BI/PD that occurred before the entity was acquired or formed, and it does not apply if the new entity is already covered by similar insurance.
Trap: Partnerships and joint ventures of which the named insured is a member are NOT automatically insureds unless they are shown in the declarations - the form specifically excludes them as "no insured" for that business.
On March 1 a named corporation acquires a new subsidiary in which it owns 80%. The policy expires December 31, and the subsidiary is never added by endorsement. Until when does the new subsidiary have automatic CGL coverage?
Why the 'Scope of Duties' Limitation Matters
Notice the recurring qualifier throughout Section II: each added insured is protected only for conduct connected to the named insured's business. A corporate executive officer is an insured for acts in the course of those corporate duties, but if the same officer causes an auto accident running a personal errand on the weekend, the CGL does not respond - and the auto exposure would be excluded anyway. An employee is an insured while serving the employer, but the form expressly strips coverage for injury the employee causes to a fellow employee (workers compensation handles that) and for damage to the employer's own property.
This scope limitation is why merely being listed or related to the named insured never guarantees coverage; the exam frequently sets up a scenario where a covered person acts outside the business and asks whether the CGL applies. The answer turns on whether the act falls within the duties the form describes.
Section I - Supplementary Payments
Supplementary Payments are amounts the insurer pays in addition to the applicable limit of insurance - they do not erode the Each Occurrence or aggregate limits (a heavily tested point). They apply to a claim or suit the insurer defends. The standard list:
| Supplementary Payment | Detail / cap |
|---|---|
| All defense costs / expenses | No dollar cap - paid in addition to limits |
| Up to $250 for bail bonds | Insurer is not obligated to furnish the bond |
| Cost of bonds to release attachments | Within the applicable limit of insurance |
| Reasonable expenses incurred by the insured at the insurer's request | Including up to $250/day for lost earnings |
| All court costs taxed against the insured | Excludes attorney fees/expenses taxed as damages |
| Pre-judgment interest awarded against the insured | On that part of the judgment the insurer pays |
| Post-judgment interest | On the full judgment until the insurer pays/tenders its limit |
Worked Numeric: Supplementary Payments Sit Outside the Limit
A CGL has a $1,000,000 Each Occurrence limit. A covered suit results in a $1,000,000 judgment - exhausting the limit. In defending, the insurer also incurred:
- $180,000 in defense attorney fees and court costs
- $9,000 in pre- and post-judgment interest
- $250 toward a bail bond and $1,000 in the insured's lost-earnings reimbursement ($250/day for 4 days)
Because Supplementary Payments are paid in addition to the limit, the insurer pays the full $1,000,000 judgment PLUS $190,250 in supplementary payments, for a total outlay of $1,190,250. The duty to defend ends once the insurer pays or tenders its applicable limit - after that, post-judgment interest stops accruing on the insurer's tab.
Trap: If a question asks the most the insurer pays "under the limit of insurance," the answer is $1,000,000 - the supplementary payments are extra and are NOT counted against the limit.
A CGL has a $500,000 Each Occurrence limit. The insurer defends a suit, pays a $500,000 settlement, and incurs $90,000 in defense costs plus $5,000 in post-judgment interest. How much does the insurer pay in total?