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ARI Blog: Article

Supplemental Payments on an Insurance Policy

Most liability insurance policies have clauses dealing with supplementary payments: the standard business auto policy, personal auto policy, and general liability policy contain additional payments sections.

The first provision in the supplementary payments clauses states that the insurer will pay the expenses it incurs. This seems reasonable since the insurer must defend the insured against covered liability claims and takes upon itself the right to settle any claim or lawsuit filed against the insured. This duty and privilege involve expenses, and in exercising that duty and right, the insurer should be responsible for paying those expenses.

This “paying the expenses” provision is normal in liability policies, but the wording may cause some questions to arise. For example, the general liability policy states that the insurer will pay the expenses it incurs in any lawsuit it defends; the business auto policy does not clarify this point, simply saying that the insurer will pay the costs “for the insured.”

What supplementary costs are covered? This begs the question: what about the investigative expenses or the expenses paid in settling a claim before any lawsuit? Since the auto policies do not limit the extent of the insurer's expenses, it can be presumed that any investigative or pre-lawsuit settlement expenses are covered.

The general liability policy does include investigative and settlement expenses in its preamble to the “paying the expenses” provision, while other approaches are less clear on this fact.

Other supplementary payment provisions deal with bonds. The general liability policy states that the insurer will pay up to $250 for the cost of bail bonds required because of an accident, while the business auto policy will pay up to $2,000. The guidelines will also pay the price of bonds to release attachments wherein the adhesive is used to dissolve an attachment of property, that is, the legal act or process of acquiring a lien upon property for any judgment satisfaction. The insurer does not have to apply for or furnish the bail bonds or the release bonds.

Note that the various policies' bond provisions do not mention the cost of premiums on appeal bonds required in any lawsuit defended by the insurer. This absence of a provision about appeal bonds begs the question: does the insurer have to appeal a decision against its insured? If there are reasonable grounds for an appeal, the insurer must pursue an appeal.

The supplementary payments provisions also offer to pay all reasonable expenses incurred by the insured if and when the insurer requests the insured to assist in the investigation or defense of the claim or lawsuit. This includes actual loss of earnings by the insured up to $250 a day because of time off work. Since the insured is required by the policy conditions to cooperate with the insurer in the investigation, settlement, or defense of any claim or lawsuit, it is very appropriate to pay the insured's reasonable expenses in such cooperation. This raises the question: What is a “reasonable expense”? And is $250 a day for time off work an acceptable sum?

Not all court costs are covered.

Court costs taxed against the insured are another item included in the supplementary payments. The current commercial general liability (CGL) form and the current business auto policy (BAP) note that these costs do not include attorneys’ fees or expenses taxed against the insured.

This means that the attorneys’ fees and expenses of opposing counsel that may be taxed against the insured are not covered as supplementary payments. By excluding opposing attorneys’ fees and expenses as additional payments, these fees and expenses can be viewed as damages the insured is obligated to pay because of the bodily injury or property damage claims. The fees and expenses are then paid out of the policy limits of insurance.

Judgment liability

Interest on the total amount of any judgment against the insured that accrues after entry of the decision is part of the supplementary payments section of all the liability policies. Usually, after a judgment is rendered against the insured, the court will allow interest to accrue on the amount due until the review is satisfied. Since the insurer may appeal the judgment, it only fits that the insurer also pays for any interest that accrues on the judgment amount while the appeal process proceeds. Note, however, that the policies do limit this interest payment in specific ways.

The CGL form also has this limitation on interest payments after the entry of any judgment. Still, it does offer a supplementary income that the other liability policies do not address. The CGL form submits to pay prejudgment interest awarded against the insured. If the insurer makes an offer to pay the applicable insurance limit, the insurer will not pay any prejudgment interest based on that period after the request is made.

The final point about supplementary payments (and the most rewarding from the insured's standpoint) is that the prices do not reduce the limit of liability. The additional costs are in addition to the policy’s limitations of liability.

As noted, the supplementary payments clauses are an integral part of the liability policy, and as part of the insurance contract, both insureds and insurers need to recognize their importance.

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