Orlando Harmon
Punitive damages are fines imposed by civil juries to punish deplorable conduct by the defendant. They differ from compensatory damages, which are intended to compensate a victim or claimant for injuries or harm sustained. While punitive damages are available in most types of civil litigation, they are not always insurable. The insurability of punitive damages depends on the laws of the state that governs the dispute. Most states allow punitive damages to be insured, with at least 26 states permitting directly assessed punitive damages to be insured. However, some states, such as California, Florida, and New York, unambiguously prohibit the insurability of punitive damages. In these states, punitive damages are intended to punish the defendant and serve as a deterrent against future wrongdoing. By allowing the defendant to shift liability for punitive damages to an insurer, the deterrent effect of punitive damages is lost. To navigate the complex landscape of punitive damages and insurability, it is essential to closely examine the specific laws and policies in each state.
| Characteristics | Values |
|---|---|
| Punitive damages insurable in HI | No clear answer |
| Number of states that allow punitive damages to be insured | Most states (at least 26) |
| Number of states that don't allow punitive damages to be insured | 11 |
| Number of states that allow insurability for vicarious liability only | 8 |
| Number of states with unclear laws | 3 + Washington, DC |
| Types of punitive damages | Direct, Vicarious |
| Types of policies that exclude punitive damages | Primary, Excess Liability |
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What You'll Learn
Punitive damages vs compensatory damages
Punitive damages are awarded in legal cases to punish defendants for their negligence or wrongdoing. This type of damage is typically applied in cases involving companies or large entities that have acted negligently, such as in cases of medical malpractice or product liability. For example, if a company knowingly sells a defective product that causes harm to consumers, they may be ordered to pay punitive damages if their negligence can be proven. Punitive damages are not designed to compensate the plaintiff but to deter others from engaging in similar behaviour.
Compensatory damages, on the other hand, are intended to compensate plaintiffs for the actual losses they have experienced. This type of award can include reimbursement for medical treatments, medical bills, lost wages, property damage, litigation costs, and future expenses resulting from the injury. These damages are much more common than punitive damages and are easier to calculate as they are based on the actual expenses incurred by the victim.
Punitive damages are usually imposed to make an example of the negligent party and deter others from behaving in a similar way. While the plaintiff will receive the monetary award, the primary purpose of punitive damages is to punish the defendant. Punitive damages are frequently limited to four times the amount of compensatory damages and are always awarded in conjunction with other damages.
There are two types of punitive damages: direct and vicarious. Direct punitive damages are assessed for an insured's wrongful acts, while vicarious punitive damages are imposed against an insured if they are liable for the acts of another party. For example, an employer is vicariously liable for the acts or omissions of an employee when the employee engages in wrongful conduct within the scope of employment.
Most states allow punitive damages to be insured, with at least 26 states permitting directly assessed punitive damages to be covered by insurance. However, some states, such as California, Florida, and New York, unambiguously prohibit the insurability of punitive damages. Other states, like Pennsylvania and Oklahoma, allow the insurability of punitive damages arising from an insured's vicarious liability.
In summary, punitive damages are intended to punish the defendant and deter similar behaviour in the future, while compensatory damages aim to compensate the plaintiff for their actual losses. Punitive damages are often limited in amount and are always awarded alongside other damages, whereas compensatory damages are more common and are based on the specific expenses incurred by the victim.
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States where punitive damages are insurable
Punitive damages are generally available in most types of civil litigation, but standards and caps for them vary across states. While punitive damages are unambiguously uninsurable in 11 states, including California, Florida, and New York, at least 26 states permit directly assessed punitive damages to be insured.
States that allow punitive damages to be insured include Pennsylvania and Oklahoma, which permit the insurability of punitive damages arising from an insured’s vicarious liability. For example, an employer is vicariously liable for the acts or omissions of an employee when the employee engages in wrongful conduct within the scope of employment.
There are three ways to secure punitive damage coverage on umbrella and excess casualty programs:
- Integrated Occurrence (IO) Policy: This policy type bundles related losses into an "integrated occurrence," granting insureds access to higher excess limits for claims involving latent, repetitive, or continuing injury or damage over many years. IO policies offer explicit coverage for punitive damages, unlike occurrence or claims-made policies.
- Wrap Policy: Issued by a Bermudian insurer affiliated with a domestic carrier, this policy provides punitive damage coverage when onshore insurance is prohibited by law, statute, or public policy. However, it does not increase the total limits available and requires notice of a punitive damage claim.
- MFV/MFJ Endorsement: This endorsement allows the insured to select the law of the jurisdiction where punitive damages were awarded, the occurrence took place, the insured is based, or the policy was issued. It provides coverage where insurability is otherwise prohibited, but courts may invalidate the provision if there is no substantial relationship between the proposed venue and the relevant parties or facts.
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States where punitive damages are uninsurable
In the United States, punitive damages are used in civil litigation to punish defendants for outrageous, willful, or wanton conduct and to deter them and others from engaging in similar conduct in the future. While compensatory damages are intended to reimburse a civil plaintiff for sustained injuries, punitive damages are intended to punish the defendant.
Currently, punitive damages are unambiguously uninsurable in 11 states. These states include California, Florida, Illinois, and New York. In addition, four states prohibit insurance coverage for punitive damage awards attributable to the direct wrongful conduct of an insured defendant, but allow coverage for punitive damages where the punitive damages are awarded for vicarious liability.
The question of the insurability of punitive damages varies by state, and the laws can change quickly. Most states allow punitive damages to be insured, with at least 26 states permitting directly assessed punitive damages to be insured.
To address the risk of punitive damages, clients can secure coverage on umbrella and excess casualty placements. There are three ways to secure punitive damage coverage on these programs: integrated occurrence (IO) policies, wrap policies, and MFV/MFJ endorsements.
Integrated occurrence (IO) policies bundle related losses into an "integrated occurrence," granting insureds access to higher excess limits for claims involving latent, repetitive, or continuing injury or damage over the course of many years. One advantage of IO policies is their explicit coverage of punitive damages.
Wrap policies, on the other hand, are issued by an alien Bermudian insurer and provide punitive damage coverage when onshore insurance is prohibited by law, statute, or public policy. Punitive wrap policies do not offer separate insurance limits and are triggered when punitive damages are sought in a state where such damages are uninsurable.
Lastly, MFV/MFJ endorsements provide coverage for punitive damages under the law of any jurisdiction most favorable to honoring the contractual intent of the insurer and insured when insurability is otherwise prohibited.
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Vicarious punitive damages
Punitive damages are payments awarded to punish bad actors engaging in reckless, willful, malicious, or wanton conduct and to deter similar wrongful conduct. There are two types of punitive damages: direct and vicarious. Direct punitive damages are assessed for an insured's wrongful acts, while vicarious punitive damages are imposed against an insured if they are liable for the acts of another party. For example, an employer is considered vicariously liable for the actions or inactions of an employee when the employee engages in wrongful conduct within the scope of their employment.
The insurability of vicarious punitive damages varies across different states in the United States. While some states, such as Florida, California, New York, and Illinois, do not allow insurance recovery for directly assessed punitive damages, others, like Pennsylvania and Oklahoma, permit the insurability of punitive damages arising from an insured's vicarious liability. The rationale behind disallowing insurance recovery for punitive damages is that it would thwart the purpose of punishing the defendant. When a defendant transfers the financial burden of punitive damages to their insurer, they effectively avoid punishment and may not be deterred from future wrongful conduct.
To address the risk transfer associated with significant punitive damage awards, particularly against large corporations, there are several options available. These options include securing coverage for these exposures on umbrella and excess casualty placements. Additionally, understanding the specific state laws and standards governing punitive damages is crucial, as each state's legislature determines the punitive damage standards.
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Direct punitive damages
There are a few ways to secure punitive damage coverage:
- An integrated occurrence (IO) policy bundles related losses, granting insureds access to higher excess limits for claims involving latent, repetitive, or continuing injury or damage over several years.
- A wrap policy, issued by a non-US insurer, provides punitive damage coverage when onshore insurance is prohibited by law or public policy.
- An MFV/MFJ endorsement provides coverage for punitive damages under the most favourable jurisdiction when insurability is otherwise prohibited.
It is important to note that punitive damage values are subjective and vary from state to state. While punitive damages are typically awarded at the court's discretion, they are generally not awarded in breach of contract claims.
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