Actuarial Notes

CGL Supplementary Payments

Study guide: Exam DISC-IA

CGL Supplementary Payments are the costs the ISO Commercial General Liability Coverage Form (CG 00 01, 04 13 edition) pays, in addition to its limits, when the insurer investigates or settles a claim or defends a suit under Coverages A and B: its own expenses, certain bonds, the insured's expenses in helping, court costs and interest. They also include, on strict conditions, the defense of an indemnitee whose liability the insured assumed in an "insured contract". These payments do not reduce the limits of insurance.

C_{\text{insurer}} = \min\left(D,\ L\right) + S

S = X + B + A + K + I_{\text{pre}} + I_{\text{post}}

  • Symbols: D is the damages, L is the applicable limit, and S is the supplementary payments. X is the insurer's own expenses (defense counsel, investigation), B is the covered bond costs, A is the insured's reasonable expenses at the insurer's request, K is the court costs taxed against the insured, I_{\text{pre}} is prejudgment interest on the part of the judgment the insurer pays, and I_{\text{post}} is post-judgment interest on the full judgment until the insurer pays, offers or deposits its part.
  • a. All expenses the insurer incurs: Defense attorneys, investigators and experts the insurer engages are paid in full, without a cap and outside the limits. This is why defense costs on a CGL don't erode the limit.
  • b. Bail bonds: Up to $250 for the cost of bail bonds required because of accidents or traffic law violations arising out of the use of any vehicle to which the bodily injury liability coverage applies. The insurer does not have to furnish the bonds.
  • c. Release of attachment bonds: The cost of bonds to release attachments, but only for bond amounts within the applicable limit of insurance. Again the insurer pays the cost but does not have to furnish the bond.
  • d. The insured's expenses: All reasonable expenses the insured incurs at the insurer's request to assist in investigating or defending the claim or suit, including actual loss of earnings up to $250 a day because of time off from work.
  • e. Court costs: All court costs taxed against the insured in the suit, but not attorneys' fees or attorneys' expenses taxed against the insured.
  • f. Prejudgment interest: Prejudgment interest awarded against the insured on the part of the judgment the insurer pays. If the insurer offers to pay the applicable limit, it pays no prejudgment interest for the period after the offer.
  • g. Post-judgment interest: All interest on the full amount of any judgment that accrues after the judgment is entered and before the insurer has paid, offered to pay or deposited in court the part of the judgment within the applicable limit. Unlike prejudgment interest, this runs on the whole judgment, including the part above the limit.
  • Defending an indemnitee (paragraph 2): When the insurer defends an insured and an indemnitee of the insured is named in the same suit, the insurer defends the indemnitee too if all of these hold: (a) the suit seeks damages for which the insured assumed the indemnitee's liability in an insured contract; (b) the insurance applies to that assumed liability; (c) the insured also assumed the indemnitee's defense, or its cost, in the same insured contract; (d) no conflict appears between the interests of the insured and the indemnitee; (e) both ask the insurer to conduct and control the indemnitee's defense and agree to the same counsel; and (f) the indemnitee agrees in writing to cooperate, send copies of legal papers, notify its other insurers and coordinate them, and authorizes the insurer to obtain records and control the defense.
  • How the indemnitee's defense is paid: While those conditions are met, the attorneys' fees and necessary litigation expenses are paid as supplementary payments; they are not damages and don't reduce the limits, even though Coverage A's contractual liability exclusion would otherwise treat an indemnitee's defense costs as damages (CGL Coverage A Exclusions). The obligation ends when the limit is used up in judgments or settlements, or when the conditions or the indemnitee's written agreement are no longer met.
  • Not for Coverage C: The section is titled Supplementary Payments, Coverages A and B. Coverage C, which pays medical expenses regardless of fault, has no supplementary payments (CGL Coverage C).
  • Contrast: Under many professional liability policies, defense costs reduce the limit (Professional Liability Insurance); under the CGL they don't, though the duty to defend still ends once the limit is exhausted (CGL Coverage A Insuring Agreement).

A Judgment Above the Limit A contractor's CGL has a $1,000,000 each occurrence limit. After a trial, the court enters a $1,300,000 bodily injury judgment against the contractor, with $130,000 of prejudgment interest calculated on the full judgment, court costs of $6,000, and $20,000 of the plaintiff's attorneys' fees taxed against the contractor. The insurer deposits its $1,000,000 in court 73 days after the judgment is entered; post-judgment interest runs at 6% a year, simple. The insurer spent $85,000 on defense counsel, and at its request the contractor's owner spent $400 on travel and missed 4 days of work worth $300 a day. What does the insurer pay, and what does the contractor bear?

Answer The damages are capped at the limit, and each supplementary payment follows its own rule.

\begin{align*}
I_{\text{pre}} &= 130{,}000 \times \frac{1{,}000{,}000}{1{,}300{,}000} \\
&= 100{,}000 \\
I_{\text{post}} &= 1{,}300{,}000 \times 0.06 \times \frac{73}{365} \\
&= 15{,}600 \\
A &= 400 + 4 \times 250 \\
&= 1{,}400 \\
S &= 85{,}000 + 1{,}400 + 6{,}000 + 100{,}000 + 15{,}600 \\
&= 208{,}000
\end{align*}

The insurer pays $1,000,000 of damages and $208,000 of supplementary payments, $1,208,000 in all. The contractor bears the $300,000 of the judgment above the limit, the $30,000 of prejudgment interest on that excess, and the $20,000 of attorneys' fees taxed against it, which item e does not cover. Post-judgment interest is paid on the full judgment because it accrued before the insurer deposited its part.

Must the Insurer Defend the Owner? A subcontractor agreed in a written construction contract to assume the project owner's tort liability for injuries arising from the subcontractor's work, and to pay for the owner's defense. A worker employed by another trade is injured and sues both. The subcontractor's CGL insurer is defending the subcontractor. In which of these cases must it also defend the owner as a supplementary payment? (a) Every condition is met. (b) The owner's lawyer insists on separate counsel of the owner's choosing. (c) The suit alleges that the owner alone was at fault, while the subcontractor argues the owner's own conduct caused the injury.

Answer

  • (a) Yes: The contract is an insured contract (the part of a business contract in which the insured assumes another's tort liability), the insurance applies, the defense was also assumed, and the other conditions hold, so the owner's defense costs are supplementary payments and don't reduce the limits.
  • (b) No: Condition e requires the indemnitee and the insured to agree that the insurer can assign the same counsel to both.
  • (c) No: Condition d requires that no conflict appear between the interests of the insured and the indemnitee. Here they are blaming each other.

How it appears on the exam

  • DISC-IA: Section 10's supplementary payments objective asks which costs the insurer pays in addition to the limits, with the dollar caps on bail bonds and lost earnings, and how pre- and post-judgment interest differ.
  • Calculation: A judgment above the limit is the usual setting, asking for the insurer's total outlay and the insured's retained amount.

Exam traps

  • Outside the limits: Supplementary payments never reduce the limits. Subtracting defense costs from the each occurrence limit understates what the insurer pays on the judgment.
  • Two interests, two bases: Prejudgment interest is paid only on the part of the judgment the insurer pays; post-judgment interest is paid on the full judgment until the insurer pays, offers or deposits its share.
  • Attorneys' fees taxed against the insured: Court costs are covered, but attorneys' fees and expenses taxed against the insured are not.
  • $250 caps: Bail bonds are covered up to $250, and the insured's lost earnings up to $250 a day; the insurer does not have to furnish the bonds.
  • Defense ends with the limit: Paying defense costs outside the limits does not mean defending forever. The duty to defend ends once the limit is used up in judgments or settlements.