Punitive damage awards, which are permitted in tort cases in many states, can put defendants on the hook for millions of dollars. While your commercial general liability (CGL) insurance policy may provide coverage for punitive damages, coverage will also depend on the public policy in the state whose law governs the dispute.
What Are Punitive Damages?
Unlike compensatory damages, which compensate a plaintiff for injury or other losses caused by another party’s tortious conduct, punitive damages do not serve as compensation for an injury. Rather, they are private fines imposed by civil juries to punish deplorable conduct by the defendant. While laws vary from state to state, punitive damages usually will not be permitted unless the defendant has shown actual intent to cause harm, as opposed to mere negligence, or has caused harm through actions that recklessly disregarded the safety or lives of others. As one court held, a plaintiff must show the defendant had a “conscious disregard of the rights of others or conduct so reckless as to amount to such disregard.”1
Debate Over Whether Punitive Damages Should Be Insurable
With highly publicized awards reaching amounts that many people think are excessive, the subject of punitive damages is central to tort reform debate, and challenges to their constitutionality have been mounted. Those who argue against insurability point out that punitive damages discourage future intentional wrongdoing by both the defendant and others in addition to punishing reprehensible behavior. Therefore, if liability for a punitive award can be shifted to the insurer, punitive damages lose their power as a deterrent. Further, bad actors are allowed to escape punishment, while the general public bears the cost of their actions in the form of higher insurance premiums.
Arguments in favor of permitting coverage for punitive damages include the need to respect private contracts, in which the insurer agreed to provide coverage in exchange for accepting the insured’s premiums, and the negative impact from potential bankruptcies if businesses are unable to pass along punitive damage awards to the insurer.
Policy Language
Language related to punitive damages varies from policy to policy, and it’s important to check your policy closely. Some policies simply state they will pay all sums that the insured becomes legally obligated to pay as damages arising out of an occurrence, without specifying the types of damages. Some policies explicitly state that the term “damages” includes punitive damages. Others say punitive damages are included wherever it is legal for the insurer to provide indemnification for a punitive damage award. On the other hand, some policies explicitly exclude punitive damages, or they state that the policy does not apply to the commission of intentional acts for which coverage would otherwise be afforded.
When a policy says “damages” are covered but does not mention punitive damages specifically, most courts have held that punitive damages are included, absent a contradictory exclusion elsewhere in the policy. But a small number of courts have interpreted the term “damages” more narrowly and barred coverage for punitive damages.
State Laws
Whether there is coverage also depends on the laws of the state that governs the dispute. While most states allow an insured to shift punitive damage awards to the insurer, a few prohibit this outright. Some states cap punitive damage awards and are generally considered more defendant-friendly, while others are deemed more plaintiff-friendly. Disparities among states regarding insurability and other punitive damage issues give rise to widespread forum shopping, with plaintiffs and defendants seeking to bring or move cases to a jurisdiction that is more advantageous to them.
If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
1 Welch v. Mr. Christmas, Inc., 57 N.Y.2d 143, 150, 440 N.E.2d 1317, 1321, 454 N.Y.S.2d 971, 975 (1982).
