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

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The standard Homeowners' policy has its claim expensesprovisions, which contain few or no controversial words or phrasesthat cause major coverage disputes.

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The first provision in the supplementary payments clause statesthat the insurer will pay the expenses it incurs (note that thestandard PAP puts this provision last). This seems reasonablebecause the insurer not only has the duty to defend the insuredagainst covered liability claims, but also takes upon itself theright to settle any claim or lawsuit that is filed against theinsured. This duty involves expenses, for which the insurer shouldbe responsible.

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This “paying the expenses” provision is normal in liabilitypolicies, but the wording may cause some questions to arise.

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For example, the General Liability policy and the Homeowners'policy state that the insurer will pay the expenses it incurs inany lawsuit it defends; the BAP and the PAP state that the insurerwill pay the expenses “for the insured.”

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

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The General Liability policy does include investigative andsettlement expenses, but the Homeowners' policy simply notes thatthe insurer will pay expenses in any lawsuit it defends. Does thismean the homeowner's insurer will pay only defense costs? It ishard to imagine that the carrier would agree to pay defense costswithout first investigating the claim, or that the insurer wouldnot prefer to settle a claim before a lawsuit is filed.

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

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

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Note that the bond provisions in the various policies do notmention the cost of premiums on appeal bonds required in anylawsuit defended by the insurer. This absence of a provisionpertaining to appeal bonds begs the question: Does the insurer haveto appeal a decision against its insured? If there are reasonablegrounds for an appeal, the insurer does have the duty to pursue anappeal.

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Going to appeals court

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

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

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The supplementary payments provisions also offer to pay allreasonable expenses incurred by the insured if the carrier requeststhe policyholder to assist in the investigation or defense of theclaim or lawsuit. This includes actual loss of earnings by theinsured up to $250 a day because of time off work.

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Court Costs

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Court costs taxed against the insured are another item includedin the supplementary payments. The current Commercial GeneralLiability (CGL) and BAP forms note that these costs do not includeattorneys' fees or expenses taxed against the insured. These feesand expenses can then be viewed as damages the insured is obligatedto pay because of the bodily injury or property damage claims. Thefees and expenses are then paid out of the policy limits ofinsurance.

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The current PAP and Homeowners' policy do not present thisproblem because neither policy specifically addresses opposingattorneys' fees or expenses. The PAP does not mention court costsat all, and the Homeowners' policy offers to pay “costs taxedagainst an insured in any suit” defended by the carrier.

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Judgment liability

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The supplementary payments section of all the liability policiesincludes interest on the full amount of any judgment— against theinsured—that accrues after entry of the judgment. Normally, after ajudgment is rendered against the insured, the court will allowinterest to accrue on the amount due until the judgment issatisfied. Because the insurer may appeal the judgment, it is onlyfitting that the insurer also pays for any interest that accrues onthe judgment amount while the appeal process proceeds. Note thatthe policies do limit this interest payment in certain ways.

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The Homeowners' policy states that it will pay the interest onthe entire judgment that accrues after entry of the judgment andbefore the insurer pays or tenders that part of the judgment thatdoes not exceed the limit of liability on the policy. The BAPstates that the insurer's duty to pay interest ends when it haspaid or offered to pay or deposited in court the part of thejudgment that is within the limit of insurance. The PAP declaresthe insurer will pay the interest accruing after a judgment, butthis duty to pay ends when the insurer offers to pay that part ofthe judgment that does not exceed the limit of liability.

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

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

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