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What are Supplementary Payments?
Supplementary Payments are provisions under liability insurance policies such as the commercial general liability and commercial auto liability insurance policies. Unbeknownst to many policyholders, these provisions offer them important coverage during the settlement of claims and lawsuits. The Supplementary Payments provision is usually included in most commercial liability policies.
For liability insurance policies, the two main obligations for insurers are:
- the “duty to defend” the insured against claims and lawsuits
- the payment of damages or settlements that result from a claim or lawsuit against the insured
Supplementary Payments cover the cost the insurer pays to investigate claims and defend lawsuits against the insured. Since defense costs can often exceed the policy limits of liability insurance, the Supplementary Payments provision helps to ensure that the insured will be covered for the defense of claims or lawsuits even when it’s outside of policy limits. This allows the insured to have the full policy limit to pay out potential damages and settlements.
A customer at your restaurant slips and falls on a wet floor and must be rushed to the emergency room and treated for a fractured collar bone. The customer sues for $100,000 worth of medical expenses and lost wages. Your insurance company hires an investigator to determine whether your business was negligent, in addition to retaining a defense attorney.
One of your employees is driving a company car to a client meeting when he collides with another vehicle, resulting in damages to the other vehicle and injuries to the driver. To defend against the claim made by the other driver, your insurance company hires an investigator to examine the damages to both vehicles and security footage from a nearby traffic stop and to determine whether the claim is valid.
An employee of your contracting company accidentally starts an electrical fire at a customer’s home, causing extensive damage to the property. Your customer sues for $200,000 worth of damages. After a lengthy and expensive lawsuit in which your insurance company provides a legal defense, the court rules against you and orders your business to pay $200,000 in damages, which is exactly your general liability insurance policy limit. Under the Supplementary Payments provision, your insurer can still cover many of the costs associated with your legal defense even though they fall outside the policy limit.
Why do you need Supplementary Payments?
For a small business, facing insurance claims and lawsuits is a part of business. The Small Business Administration reports that 36%-53% of small businesses are involved in litigation in any given year, while general liability losses are on the rise for businesses across a variety of industries. Settling claims and defending lawsuits are complex undertakings that involve many experts, processes, and fees. Your insurer will hire investigators to examine claims and attorneys to prepare your legal defense. There will also be legal fees, paperwork, expert witness fees, lost earnings, bail bonds, and even interest on settlements.
Insurance companies often also ask the policyholder to assist in the investigation of claims. This might mean providing documents, gathering information, hiring a specialist to conduct a forensic examination, or attending a deposition (and paying for the parking and transportation, etc). In these cases, your company would pay these costs and file for reimbursements under the Supplementary Payments provision. Supplementary payments will cover a number of expenses associated with investigating claims and defending lawsuits, outside of the policy limits. Even if you have reached the policy limit after paying a claim or court settlement, Supplementary Payments will provide that extra coverage to help alleviate the financial burden of investigating claims and defending lawsuits.
What is covered under Supplementary Payments?
Under typical commercial general liability insurance policies, Supplementary Payments will cover the following costs:
Covers the insurer’s expenses to investigate claims and defend your business against a lawsuit when the need arises. This would include hiring an investigator to examine a claim or retaining an attorney to prepare your legal case.
Covers all reasonable expenses incurred by the insured at the insurance company’s request to assist the insurer in the investigation or defense of the claim or lawsuit, including $250 a day for lost earnings due to time off from work.
- Example: The insured’s defense counsel requests a forensic examination of the insured’s computer files and servers. The cost of the examination will qualify as a “reasonable expense” incurred by the insured at the request of the insurance company.
- Example: At your attorney’s request, you take a day off work to be a witness at a deposition. The Supplementary Payments provision will cover your lost earnings (up to $250) from missing a day of work.
Provides a specified amount for 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.
- Example: An employee who is in a collision with another vehicle leaves the scene of the accident after injuring the other driver. Police apprehend the employee and place him under arrest at the city jail. Your company pays his $250 bail bond to free him from jail before he is required to appear in court.
If the plaintiff wins the case, you will be responsible for court costs such as the fees for filing the lawsuit, fees for document preparation, fees to subpoena witnesses, and fees paid to expert witnesses.
- Example: A homeowner is suing your contractor company for $100,000 for setting off an electrical fire and damaging his property. He pays the court a $200 fee to file the lawsuit. After he wins the case, your business is responsible not only for paying the damages but also court costs such as the filing fee.
The pre-judgment interest compensates the plaintiff for the damages he suffered before the date of the final court settlement. If the plaintiff wins the case, he will be compensated for the interest that would have accrued on the judgment from the time of the incident to the time he was awarded the judgment.
- Example: A client sues your contracting company for causing an electrical fire that severely damages their home. In the lawsuit that transpires, the court orders your company to pay $300,000 in damages. While the accident happened in December 2017, the final court judgment isn’t made until August 2018. You will be required to pay interest on the $300,000 award for the nine months between the date of the accident and the date of the court decision.
This is interest that accrues on the judgment from the time of the court decision to the time of the actual payment.
- Example: After your restaurant is sued over a food poisoning incident, the court awards the plaintiff $10,000 in damages. Your insurance company appeals the settlement to a higher court. The appeals process takes seven months, but ultimately the decision is upheld and your company pays the damages. The plaintiff will receive interest on the $10,000 from the day of the original court settlement to the day he receives the settlement money.
What isn’t covered under Supplementary Payments?
Costs You Incur Not at the Request of the Insurance Company
If you incur costs for the investigation of the claim or defense of the lawsuit that are not at the request of the insurance company, then you will be responsible for those costs. For example, if you hire your own attorney to defend your case rather than allowing your insurance company to provide you with an attorney, Supplementary Payments will not cover the cost of your attorney.
Attorney Fees of the Opposing Counsel
When an insured loses a court case, the court may require the insured to pay for court costs. While some of the court costs will be covered by Supplementary Payments, if the court awards attorneys fees and expenses to the opposing party, those expenses will not always be covered by the Supplementary Payments provision. Some policies do cover these fees and expenses; other policies consider these damages that will be paid out of the policy limits of the insurance.
Claims and lawsuits against small businesses are common, time-consuming, and expensive. Preparing an adequate defense can require an enormous amount of human and financial resources. Small businesses need adequate coverage from liability policies to protect against the risk of claims and lawsuits and the considerable costs of defending against them. Supplementary Payments are important provisions granted by liability insurance policies because they can cover the costs associated with investigating claims and defending against lawsuits, outside of policy limits.