Insurability of Punitive Damages

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INTRODUCTION

The intent of this survey is to provide a quick reference guide to the public policy considerations and the legal issues involved in determining whether a particular punitive damage award is insurable. The analysis presumes that such damages would otherwise be afforded coverage, but, of course, many policies exclude such damages. Whether insurance coverage is available for such awards is a vital question for the insured, the insurer, and the insurance broker, as six percent of winning plaintiffs in civil jury trials walk away with punitive damage awards, and some multi-million-dollar punitive damage verdicts soar to over 500 times the amount of jury-awarded compensatory damages. (U.S. Department of Justice Statistics). However, as the following analysis shows, the fifty states and the District of Columbia have divergent views concerning the insurability of punitive damages.

Often referred to as exemplary or vindictive damages, punitive damages serve to compensate the injured and, more commonly, to punish the wrongdoer. Depending on the jurisdiction and cause of action, the standard for awarding punitive damages may range from simple negligence to deliberate intent to harm.

Although insurance policy language plays a significant role, particularly in the event that the policy excludes such damages from coverage, public policy is usually the focus of a court’s insurability analysis. Typically, courts that have concluded that punitive damages ought not to be insurable (1) display a general objection to punitive damage awards as windfalls for the plaintiff, (2) believe that insuring punitive damages transfers the burden of the award from the wrongdoer to innocent premium-paying insureds, or (3) object that coverage undercuts the deterrent value of punitive damages. Other courts have approved insurance coverage for punitive damages, finding that (1) the presence of insurance coverage has no impact on the deterrent effect of punitive damages, (2) the expectation of the insured that the policy will cover all awarded damages must be honored, and (3) the acceptance of the premium estops the insurer from denying coverage that arguably exists in the insurance contract.

Another distinction is often drawn between “directly” assessed punitive damages, which are based upon the insured’s own wrongful acts, and “vicariously” assessed punitive damages, which are based upon another’s misconduct for which the insured is held legally liable. The distinction between directly assessed punitive damages and vicariously assessed punitive damages may at times become complex due to the particular factual circumstances of each case. However, in its simplest form, the distinction is that directly assessed punitive damages are assessed against the actual wrongdoer. Cases on vicariously assessed punitive damages often discuss public policy goals and whether innocent parties, and their insurers, should be forced to bear punishment intended for another. Vicariously assessed punitive damages are addressed frequently in cases dealing with whether an employer is liable for the wrongful acts of an employee. Specific instances include the liability of an accounting firm for the acts of an accountant, the liability of a corporation for the acts of a corporate officer, the liability of a law firm for the acts of a partner, and the liability of a police department for the acts of a police officer. Occasionally, this situation also arises under the liability coverage in homeowner’s insurance, when attempts are made to hold parents vicariously liable for punitive damages arising from the wrongful acts of their children. In light of the considerations typically at play, jurisdictions that hold directly assessed punitive damages to be insurable are very likely to find vicariously assessed punitive damages to be insurable.

We recommend a detailed analysis of each punitive damages problem to determine whether a particular damage award is insurable. While we have included a summary of each jurisdiction’s position in the chart that follows, the accompanying analytical text should also be consulted as it provides a discussion of each jurisdiction’s law.