Most if not all liability insurance policies have clauses dealing with supplementary payments: the standard Business Auto policy (BAP), Personal Auto policy (PAP), and General Liability policy all contain supplementary payments sections.

The standard Homeowners' policy has its claim expenses provisions, which contain few or no controversial words or phrases that cause major coverage disputes.

The first provision in the supplementary payments clause states that the insurer will pay the expenses it incurs (note that the standard PAP puts this provision last). This seems reasonable because the insurer not only has the duty to defend the insured against covered liability claims, but also takes upon itself the right to settle any claim or lawsuit that is filed against the insured. This duty involves expenses, for which the insurer should be responsible.

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 and the Homeowners' policy state that the insurer will pay the expenses it incurs in any lawsuit it defends; the BAP and the PAP state that the insurer will pay the expenses “for the insured.”

This begs the question: What about the investigative expenses or the expenses paid in settling a claim prior to any lawsuit? Because the Auto policies do not limit the extent of the expenses the insurer will pay, it can be presumed that investigative or pre-settlement expenses are covered.

The General Liability policy does include investigative and settlement expenses, but the Homeowners' policy simply notes that the insurer will pay expenses in any lawsuit it defends. Does this mean the homeowner's insurer will pay only defense costs? It is hard to imagine that the carrier would agree to pay defense costs without first investigating the claim, or that the insurer would not prefer to settle a claim before a lawsuit is filed.

Other supplementary payment provisions deal with bonds. The General Liability policy and the PAP state that the insurer will pay up to $250 for the cost of bail bonds required because of an accident or traffic law violations, while the BAP will pay as much as $2,000.

The Homeowners' policy does not mention bail bonds for auto accidents because such accidents are excluded from coverage under the Homeowners' policy. The policies also will pay the cost of bonds to release attachments wherein the bond is used to dissolve an attachment of property, that is, the legal act or process of acquiring a lien upon property for any satisfaction of a judgment. The insurer does not have to apply for or furnish the bail bonds or the release bonds.

Note that the bond provisions in the various policies do not mention the cost of premiums on appeal bonds required in any lawsuit defended by the insurer. This absence of a provision pertaining to 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 does have the duty to pursue an appeal.

Going to appeals court

In Cathay Mortuary Inc. v. United Pacific Insurance Co. (1984), a U.S. District Court held that there is a general consensus that an insurer is obligated to pursue an appeal on behalf of its insured when there are reasonable grounds for an appeal. The court also ruled that an appeal was part and parcel of the general duty to defend and was not attributable to the provision regarding payment for the cost of appeal bonds.

The California Court of Appeals in Jenkins v. Insurance Co. of North America favorably quoted the ruling in Cathay Mortuary and listed other court rulings supporting the insurer's duty to appeal. But beyond court rulings on the subject, it is just common sense and sound risk management practice to appeal adverse judgments, so paying for appeal bonds should be considered an integral (even if not mentioned) part of the supplementary payments section of insurance policies.

The supplementary payments provisions also offer to pay all reasonable expenses incurred by the insured if the carrier requests the policyholder 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.

Court Costs

Court costs taxed against the insured are another item included in the supplementary payments. The current Commercial General Liability (CGL) and BAP forms note that these costs do not include attorneys' fees or expenses taxed against the insured. These fees and expenses can then 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.

The current PAP and Homeowners' policy do not present this problem because neither policy specifically addresses opposing attorneys' fees or expenses. The PAP does not mention court costs at all, and the Homeowners' policy offers to pay “costs taxed against an insured in any suit” defended by the carrier.

Judgment liability

The supplementary payments section of all the liability policies includes interest on the full amount of any judgment— against the insured—that accrues after entry of the judgment. Normally, after a judgment is rendered against the insured, the court will allow interest to accrue on the amount due until the judgment is satisfied. Because the insurer may appeal the judgment, it is only fitting that the insurer also pays for any interest that accrues on the judgment amount while the appeal process proceeds. Note that the policies do limit this interest payment in certain ways.

The Homeowners' policy states that it will pay the interest on the entire judgment that accrues after entry of the judgment and before the insurer pays or tenders that part of the judgment that does not exceed the limit of liability on the policy. The BAP states that the insurer's duty to pay interest ends when it has paid or offered to pay or deposited in court the part of the judgment that is within the limit of insurance. The PAP declares the insurer will pay the interest accruing after a judgment, but this duty to pay ends when the insurer offers to pay that part of the judgment that does not exceed the limit of liability.

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

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

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Supplementary Payouts: What's Covered?

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