Understanding Supplementary Payments
In the world of the Personal Auto Policy (PAP), Part A: Liability Coverage is the most critical component for protecting an insured against financial ruin following an accident. However, many students preparing for the practice Auto questions overlook a vital sub-section of this coverage: Supplementary Payments.
Supplementary payments are additional coverages provided by the insurer to handle specific costs associated with a claim or lawsuit. The most important concept to remember for your exam is that these payments are made in addition to the policy's stated limits of liability. This means that even if an insured has a $100,000 bodily injury limit and a judgment is rendered for that full amount, the insurer will still pay for the defense costs and other supplementary items without reducing that $100,000 limit.
For a broader look at how this fits into the overall policy structure, refer to our complete Auto exam guide.
Standard Supplementary Payment Limits
The Duty to Defend and Legal Expenses
The primary supplementary payment is the cost of legal defense. The insurer has a duty to defend the insured in any suit seeking damages for bodily injury or property damage covered by the policy. This duty is broader than the duty to pay damages; even if the lawsuit is groundless, false, or fraudulent, the insurer must provide a defense.
- Defense Costs: Includes attorney fees, court costs, and investigative expenses. These are paid until the limit of liability has been exhausted by payment of a judgment or settlement.
- Appeal Bonds: If a case is appealed, the insurer pays the premiums for bonds to release attachments or for appeal bonds, though they are not required to furnish the bonds themselves.
- Post-Judgment Interest: The insurer pays interest that accrues on the entire judgment after the entry of judgment and before the insurer has paid, offered to pay, or deposited in court that part of the judgment that does not exceed the limit of liability.
Liability Limits vs. Supplementary Payments
| Feature | Liability Limits (Part A) | Supplementary Payments |
|---|---|---|
| Impact on Policy Limit | Reduces the available limit | Paid in addition to the limit |
| Primary Purpose | Pays 3rd party damages | Pays costs of the claim process |
| Common Examples | Medical bills, Car repairs | Attorney fees, Bail bonds |
| Dollar Restrictions | Restricted by Declarations | Specific sub-limits apply (e.g. $250) |
Bail Bonds and Loss of Earnings
Two specific supplementary payments often appear as numerical questions on the Property & Casualty exam: Bail Bonds and Loss of Earnings.
Bail Bonds: The policy provides up to $250 for the cost of bail bonds required because of an accident, including related traffic law violations, as long as the accident results in bodily injury or property damage covered by the policy. It is important to note that the policy pays for the premium for the bond, not the full face value of the bail itself.
Loss of Earnings: If the insurer requests the insured to attend hearings or trials to help in the defense of a claim, the insured may lose wages. The policy covers up to $200 per day for these lost earnings. Note that this does not cover general "pain and suffering" or lost time—it must be at the insurer's request.
Exam Tip: The 'In Addition To' Rule
When you see a question asking if defense costs reduce the liability limit, the answer is almost always No. In standard Personal Auto Policies, supplementary payments are extra benefits provided to ensure the insured is adequately defended without eating into the money meant to pay for the victim's injuries.
Frequently Asked Questions
Yes. The insurer's duty to defend and provide supplementary payments exists regardless of fault, as long as the incident is a covered occurrence under the policy terms.
Unlike bail bonds or loss of earnings, there is generally no specific dollar limit on defense costs. However, the insurer's obligation to defend ends once the policy's liability limit has been fully paid out in a settlement or judgment.
No. Supplementary payments for bail bonds only apply if the violation is related to an accident that involves bodily injury or property damage covered under the policy.
Yes, provided the deposition was at the request of the insurance company to assist in the defense of the claim.