10.3 Who Is an Insured and Supplementary Payments
Key Takeaways
- Who Is an Insured (Section II) extends coverage by named-insured type—sole proprietor/spouse, partners, LLC members and managers, corporate officers/directors/stockholders—plus employees, volunteers, real estate managers, and a deceased insured's legal representative.
- Employees are not insured for injury to co-employees or the named insured; newly acquired organizations get automatic insured status for up to 90 days.
- Supplementary Payments (defense costs, bonds, $250 bail, $250/day lost earnings, court costs, pre- and post-judgment interest) are paid IN ADDITION to the limits and do not erode them.
- Separation of Insureds applies the policy separately to each insured but does not increase the limit of insurance.
Who Is an Insured (Section II)
Section II — Who Is An Insured of the CGL automatically extends coverage beyond just the named insured. The persons and organizations qualifying as insureds depend on the type of named insured shown in the Declarations.
- Individual (sole proprietor): the individual and their spouse, but only for the conduct of the named business.
- Partnership or joint venture: the partners/members and their spouses, but only for the business.
- Limited liability company (LLC): the members (for the LLC's business) and the managers (for their duties as managers).
- Organization other than the above (corporation): the company's executive officers, directors, and stockholders, but only for their duties or company liability.
In addition, certain parties are insureds automatically: employees and volunteer workers (for acts within the scope of employment/duties), real estate managers acting for the named insured, and the legal representative of a deceased named insured.
Employee and Newly Acquired Entity Rules
Employees and volunteer workers are insureds for acts within the scope of their work, BUT important carve-outs apply:
- They are NOT insured for BI/PD to a co-employee or to the named insured itself.
- They are NOT insured for professional health-care services unless the named insured is in a non-health-care business.
- An employee is not insured for liability arising out of their own owned property.
Newly acquired or formed organizations are automatically insureds for up to 90 days after acquisition (or to the end of the policy period, whichever is first), provided no other similar insurance applies. After 90 days, the entity must be specifically endorsed onto the policy.
Exam trap: The Separation of Insureds condition means the policy applies separately to each insured against whom a claim is made — as if each had separate coverage — but it does NOT increase the policy limits. This is why one insured can sue under coverage triggered by another insured's conduct.
Supplementary Payments — In Addition to Limits
Supplementary Payments are amounts the insurer pays in addition to (over and above) the applicable limit of insurance. They do not erode the Each Occurrence or aggregate limits — a frequently tested point. The insurer pays these with respect to any claim or suit it defends.
| Supplementary Payment | Notes / Cap |
|---|---|
| All expenses the insurer incurs (defense costs) | Defense is outside the limits in the CGL |
| Cost of bonds to release attachments | Limited to the applicable limit of insurance |
| Bail bonds for accidents/traffic-law violations | Capped at $250 per bond |
| Reasonable expenses incurred by the insured at insurer's request | Including up to $250/day for lost earnings |
| Court costs taxed against the insured | Pre-judgment interest excluded here |
| Pre-judgment interest awarded against the insured | Paid as supplementary |
| Post-judgment interest on the entire judgment | Until the insurer pays/tenders its limit |
Worked Example: Limits vs. Supplementary Payments
An insured with a $1,000,000 Each Occurrence limit is sued. A jury awards $1,000,000 in damages. The insurer also incurs $150,000 in defense (attorney) costs, $8,000 in court costs taxed against the insured, and $20,000 in post-judgment interest accruing before the insurer tenders its limit.
- The $1,000,000 judgment exhausts the each-occurrence limit.
- The $150,000 defense costs, $8,000 court costs, and $20,000 interest are all Supplementary Payments, paid in addition to the $1,000,000.
- Total the insurer pays: $1,178,000 — well above the stated $1M limit.
This is why agents stress that the CGL's true cost to the insurer often exceeds the face limit, and why "defense outside the limits" is a selling point versus eroding-limits ("defense within limits") policies common in professional liability.
How Section II and Supplementary Payments Interact
Because the policy applies separately to each insured under Separation of Insureds, an additional insured (added by endorsement such as CG 20 10 for ongoing operations or CG 20 37 for completed operations) generally enjoys the same defense and supplementary-payment benefits as the named insured, subject to the scope of the endorsement.
However, the shared limit of insurance is not multiplied by the number of insureds — all insureds draw from the same Each Occurrence and aggregate limits. Candidates frequently miss that adding insureds expands who is protected without expanding how much protection exists, while supplementary payments remain available on top of that single shared limit for each defended suit.
Who Counts as an Insured Under the CGL
Section II defines insureds by the named insured's business structure. If the named insured is an individual, the insured includes the person and spouse for business conduct; a partnership includes partners and their spouses for partnership business; a corporation includes executive officers, directors, and stockholders acting within their duties. Employees and volunteer workers are insureds for acts within the scope of employment — but not for injury to a fellow employee or to the named insured.
| Party | Insured Status |
|---|---|
| Employee acting in scope of duties | Yes (with employee-injury exclusion) |
| Newly acquired/formed organization | Yes, automatically for up to 90 days |
| Real estate manager for the insured | Yes |
| Independent contractor | Generally no – add by endorsement |
The 90-day newly acquired entity rule and the employee-to-employee injury exclusion are reliable exam points. Supplementary payments — defense costs, bail bonds up to a limit, the $250-per-day loss-of-earnings allowance, and post-judgment interest — are paid in addition to the limit, preserving the full limit for the claimant.
For how long is a newly acquired or formed organization automatically covered as an insured under the CGL before it must be specifically endorsed?
An insured with a $1,000,000 each-occurrence limit loses a $1,000,000 judgment. The insurer also incurs $120,000 in defense costs and $15,000 in post-judgment interest. How much does the insurer pay in total?