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Is it covered? The purpose of supplementary payments.

Byline: David D. Thamann, JD, CPCU

Most if not all liability insurance policies have clauses dealing with supplementary payments: the standard business auto policy, personal auto policy, and general liability policy all contain supplementary payments sections.

The standard homeowners policy has its claim expenses provisions (note that these are standard Insurance Services Office forms). These provisions usually contain few or no controversial words or phrases that cause major coverage disputes when an insured presents a claim to the insurer. However, being noncontroversial does not mean supplementary payments are not important and not an integral part of the insurance policy.

The first provision in the supplementary payments clauses states that the insurer will pay the expenses it incurs (note that the standard personal auto policy puts this provision last). This seems reasonable since 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 and right obviously involve expenses and in exercising that duty and right, the insurer should be responsible for the payment of 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 and the homeowners policy state that the insurer will pay the expenses it incurs in any lawsuit it defends; the business auto policy and the personal auto policy do not clarify this point, simply stating that the insurer will pay the expenses "for the insured."

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What supplementary costs are covered?

This begs the question: what about the investigative expenses or the expenses paid in settling a claim prior to any lawsuit? Since the auto policies do not limit the extent of the expenses the insurer will pay, 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, 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 homeowner's insurer 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. This lack of clarity pertaining to investigative expenses or settlement expenses is most probably an undisputed issue, and expenses that the homeowners insurer will pay as supplementary payments.

Other supplementary payment provisions deal with bonds. The general liability policy and the personal auto policy 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 business auto policy will pay up to $2,000. The homeowners policy does not mention bail bonds for auto accidents since 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 has the duty to pursue an appeal.

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Going to appeals court

In Cathay Mortuary, Inc. v. United Pacific Insurance Company, 582 F. Supp. 650 (1984), a United States District Court held that there is a general consensus that an insurer is obligated to pursue an appeal on behalf of its insured where 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 Court of Appeal, Fourth District, Division 3, California in Jenkins v. Insurance Company of North America, 220 Cal.App.3d 1481 (1990) 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 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. (Note that the current personal auto policy limits this loss of earnings to $200 a day, but makes up for it by allowing payment for "other reasonable expenses incurred at our request.") 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 for the insurer to pay the reasonable expenses incurred by the insured in such cooperation. This raises the questions: 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 supplementary payments, 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 the current homeowners policy do not present this problem since 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 insurer. Presumably, the PAP would pay opposing attorney's fees and expenses as part of the damages for which the insured is found to be liable. And, the language in the homeowners policy is inclusive of the fees and expenses, as long as a court considers these amounts as covered costs taxed against the insured.

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Judgment liability

Interest on the full amount of any judgment against the insured that accrues after entry of the judgment is part of the supplementary payments section of all the liability policies. 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. Since 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 however, 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.

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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Publication:Property and Casualty 360
Date:Jun 12, 2015
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