What are Supplementary Payments?

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Most general liability policies contain a subsection entitled Supplementary Payments. This subpart appears at the end of the Coverages section (after the discussion of Medical Payments coverage). 

Indemnity Versus Defense Coverage

A liability policy provides two basic coverages: indemnity and defense. Indemnity coverage consists of damages and settlements that your insurer pays on your behalf in response to claims or suits against you by third parties.

Bodily Injury and Property Damage Liability (Coverage A) covers damages that you are legally obligated to pay because of bodily injury or property damage caused by an occurrence. Personal and Advertising Injury (Coverage B) covers damages that you are legally obligated to pay because of personal and advertising injury caused by an offense. Any damages your insurer pays or settlements it makes on your behalf under Coverages A or B are part of indemnity coverage. Medical Expenses your insurer pays under Medical Coverage (Coverage C) are also part of indemnity coverage. Damages, settlements and/or medical expenses your insurer pays are subject to limits described in your policy.

In addition to indemnity coverage, your liability policy covers the cost of investigating a claim and defending you against a lawsuit. Suppose that you operate a restaurant. Jim, a customer, files a claim against your company.

Jim alleges that a sandwich he ate at your restaurant made him sick. Jim sends you a letter demanding $15,000. You send the demand to your insurer. It will investigate the claim and determine whether the claim is valid. If Jim ultimately files a lawsuit against your company, your insurer will provide an attorney to defend you.

The expenses the insurer incurs in conducting the investigation and defending you against Jim's suit are covered under Supplementary Payments.

Under most (but not all) general liability policies, the expenses included under Supplementary Payments do not reduce your policy limit. These costs are covered in addition to the limit.

Supplementary Payments

Here's a summary of what's included under Supplementary Payments coverage under the ISO liability policy. If your policy is not written on the ISO form, these coverages may vary slightly. Supplementary Payments are covered only in conjunction with a claim the insurer investigates or settles, or a suit it defends.

Insurer's Expenses

Your policy provides unlimited coverage for expenses incurred by the insurer to defend you. An attorney may be employed by the insurer or by an independent law firm.

Bail Bonds

Your insurer will pay up to $250 for the cost of bail bonds required because of an accident or traffic law violation arising out of the use of a vehicle that is covered for bodily injury. "Vehicle" means mobile equipment since the liability policy excludes accidents arising from the use of autos.

For example, suppose that one of your employees is arrested by a police officer for leaving the scene of a traffic accident that caused injury to another driver.

When the accident occurred the employee was driving a piece of farm machinery. Your policy will pay up to $250 toward the cost of a bail bond required by the employee.

Attachment Bond

Suppose that a customer has filed a lawsuit against your company. It appears that the plaintiff will win a judgment against you. However, the plaintiff suspects that you might skip town (or do something else) to avoid paying the damages. Thus, he asks the court to attach (seize) some property belonging to you. If you fail to pay the damages, the court may sell the property in order to compensate the plaintiff. You can have the property released by purchasing an attachment bond. The bond guarantees that the judgment against you will be paid. Your policy will pay the cost of an attachment bond if the bond amount is within the applicable limit of insurance.

Investigation Expenses

Your insurer will pay "reasonable" costs you incur to assist in its investigation of a claim or suit. For instance, the insurer may require you to attend a deposition during normal work hours. The insurer will pay the costs you incur (transportation, parking etc.) to comply. It will also pay up to $250 a day for loss of earnings because of time you take off from work.

Court Costs

Your insurer will pay various court costs that may be charged to you if the plaintiff wins the lawsuit. Examples are a suit filing fee, the cost of court transcripts, the cost of copying documents, and charges for subpoenas served on witnesses. Note that if the plaintiff wins the case and you are required to pay all or part of his or her attorney’s fees, those fees are considered damages, not Supplementary Payments. That is, the plaintiff's attorney's fees (not your attorney's fees) qualify as damages.

Prejudgment Interest

Prejudgment interest is designed to compensate the plaintiff for the injury or damage he or she suffers between the time the injury or damage occurs and the time the judgment is awarded by a court. State law determines how this interest is calculated. The insurer will pay interest only on the portion of the judgment it pays (if your insurer is sharing the judgment with another insurer.)

Post-judgment Interest

Post-judgment interest compensates the plaintiff for the injury or damage suffered from the time the court issues a judgment until the judgment is actually paid. Post-judgment interest is paid on the full amount of the judgment. It is calculated in accordance with state law.