Orlando Harmon
New York is one of only two states that completely prohibits insurance for punitive damages. This is because punitive damages are designed to punish the wrongdoer and deter further misbehavior. While the Supreme Court of the United States has held that it is legal for insureds to purchase coverage beyond the borders of the state, New York insureds cannot buy coverage for punitive damages from New York-licensed insurers or eligible excess line insurers. This has led to the proposal of NY State Senate Bill 2017-S423B, which seeks to amend the insurance law to permit a liability policy to provide coverage for punitive damages and civil penalties.
| Characteristics | Values |
|---|---|
| Are punitive damages insurable in New York? | No |
| Number of states that do not allow punitive damages to be insured | 4 (including New York) |
| Number of states that allow punitive damages to be insured | 26 |
| Number of states that allow insurability of punitive damages arising from an insured's vicarious liability | At least 2 |
| New York's public policy on punitive damages | Precludes insurance indemnification for punitive damages |
| New York's Supreme Court decision on punitive damages from a foreign jurisdiction | Not insurable under NY law |
| New York State Senate Bill 2017-S423B | Seeks to amend the insurance law to permit a liability policy to provide coverage for punitive damages |
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What You'll Learn
- New York public policy bans insurance coverage for punitive damages
- New York insureds cannot buy coverage from New York-licensed insurers
- The Court of Appeals determined punitive damages were not insurable
- The Supreme Court ruled punitive damages from a foreign jurisdiction are not insurable
- The Department of Financial Services enforces the public policy
New York public policy bans insurance coverage for punitive damages
This precedent has been followed by subsequent New York cases, and the state's highest court reaffirmed this policy in Zurich Ins. Co. v. Shearson Lehman Hutton, Inc. in 1994 and Home Insurance Co. v. American Home Prods. Corp. in 1990. As a result, New York-licensed insurers are prohibited from providing coverage for punitive damages to New York insureds. This ban extends to eligible excess line insurers as well.
However, the enforcement of this policy has become challenging due to interstate commerce. In 2005, the Department of Financial Services acknowledged that a New York-licensed reinsurer could reinsure an insurer not licensed in New York for policies with punitive damage coverage. Additionally, while New York insureds cannot purchase coverage for punitive damages within the state, the Supreme Court of the United States has held that it is legal for them to buy such coverage from insurers outside the state's borders.
In 2017, New York State Senate Bill S423B was introduced to amend the insurance law and permit liability policies to provide coverage for punitive damages and civil penalties. The bill aimed to align New York with the majority of states that allow insurers to provide coverage for punitive damages. It sought to address the issue of uncollected punitive damage awards, where judgment debtors file for bankruptcy or cease business without satisfying the award. However, it is unclear if this bill was passed.
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New York insureds cannot buy coverage from New York-licensed insurers
New York insureds cannot buy coverage for punitive damages from New York-licensed insurers. This is because New York is one of only two states that completely bar insurance for any punitive damages assessed. The Court of Appeals in New York determined in 1979 that punitive damages were not insurable because they are designed to punish the wrongdoer and deter further misbehavior. This ruling, known as the Hartford case, has been the leading statement on this issue of public policy in the state.
While the Hartford case remains enforceable and administrable, it has been acknowledged that a New York-licensed reinsurer can reinsure an insurer not licensed in New York for policies with punitive damage coverage. This is due to the difficulties presented by interstate commerce. The Department of Financial Services continues to enforce this policy, but it has not been reconsidered in light of national trends.
New York insureds who want coverage for punitive damages must purchase insurance from insurers not licensed in the state, including off-shore insurers in Bermuda and other countries beyond the jurisdiction of New York courts and state regulators. While this practice is legal, as affirmed by the Supreme Court of the United States, it demonstrates the challenges of adhering to the state's public policy on punitive damage coverage in an era of globalized commerce.
Efforts have been made to amend New York's insurance law to permit liability policies to provide coverage for punitive damages and civil penalties. The proposed legislation, NY State Senate Bill 2017-S423B, seeks to address the issue of uncollected punitive damage judgments, where judgment debtors file for bankruptcy or cease operations without satisfying the award. By allowing insurance coverage for punitive damages, the proposed law aims to foster the collection of court-awarded damages by plaintiffs.
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The Court of Appeals determined punitive damages were not insurable
In 1979, the Court of Appeals determined that punitive damages were not insurable in New York State. The case in question was Hartford v. Village of Hempstead (48 N.Y. 2d 218), which found that punitive damages are designed to punish the wrongdoer and deter further misbehavior. This decision has been upheld by all subsequent New York cases on the issue, which have largely been constrained to follow the Hartford case.
This policy has not been reconsidered in over thirty-five years, despite a national trend towards permitting insurers to provide coverage for punitive damages. In fact, New York is one of only two states that completely bar insurance for any punitive damages assessed. Insureds in New York cannot buy coverage for punitive damages from insurers licensed in the state and must instead purchase such insurance from off-shore insurers in Bermuda and other countries beyond the jurisdiction of New York courts.
The result of this policy is that punitive damage awards in New York often go uncollected, as the judgment debtor may file for bankruptcy or cease operations without satisfying the award. A 2017 bill, NY State Senate Bill S423B, sought to amend the insurance law to permit a liability policy to provide coverage for punitive damages and civil penalties. The bill acknowledged that the current policy is antiquated and difficult to enforce and administer in the face of interstate commerce.
The New York Supreme Court has also recognized that the public policy ban on insurance coverage for punitive damages under New York law extends to preclude indemnification of an award from a foreign jurisdiction where the purpose of punitive damages is similar. In the case of Certain Underwriters at Lloyd’s v. BDO Seidman LLP, the court found that a $55,000,000 punitive damages award against BDO Seidman LLP was not covered by their policy, which excluded coverage for "any claim or claims for fines, penalties, punitive or exemplary damages."
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The Supreme Court ruled punitive damages from a foreign jurisdiction are not insurable
The New York Supreme Court has ruled that punitive damages from a foreign jurisdiction are not insurable under New York law. This decision was made in the case of Certain Underwriters at Lloyd's v. BDO Seidman LLP in 2012, where a Florida jury awarded $55 million in punitive damages against BDO Seidman LLP. Lloyd's argued that BDO's policy excluded coverage for "any claim or claims for fines, penalties, punitive or exemplary damages."
The court recognized that the public policy ban on insurance coverage for punitive damages in New York extends to awards from foreign jurisdictions where the purpose of such damages is similar—to punish the defendant for wrongful conduct and deter similar misconduct. This ruling is consistent with the Court of Appeals' determination in 1979 in Hartford v. Village of Hempstead that punitive damages are not insurable in New York due to their nature of punishing wrongdoers and deterring future misbehavior.
While New York is one of the few states with a complete bar on insurance for punitive damages, the enforceability of such a ban in the context of interstate commerce has been challenging. The Department of Financial Services continues to uphold this public policy, but it acknowledged in 2005 that a New York-licensed reinsurer could reinsure an out-of-state insurer for policies with punitive damage coverage.
To secure punitive damage coverage, insureds in New York have had to purchase insurance from unlicensed, offshore insurers beyond the jurisdiction of New York courts. This situation has resulted in uncollected judgments where plaintiffs do not benefit, and judgment debtors file bankruptcy without satisfying the punitive damage award.
Some states have ruled against the insurability of punitive damages as it undermines the rationale of punishing the defendant. When insurers bear the burden of punitive damages, it fails to deter future misconduct and passes the cost to uninvolved, premium-paying insureds.
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The Department of Financial Services enforces the public policy
The public policy of New York precludes insurance indemnification for punitive damage awards. The purpose of punitive damages is to punish and deter others from acting similarly, and allowing coverage would defeat this purpose. The Department of Financial Services enforces this public policy, which was set by the judiciary over thirty-five years ago.
In recognition of the issues involving interstate commerce, the Department of Financial Services acknowledged in an Office of General Counsel opinion dated December 21, 2005, that a New York-licensed reinsurer is permitted to reinsure an insurer not licensed in New York for policies with punitive damage coverage under most circumstances. This is on the assumption that the transaction does not violate New York law or the public policy concerns of the state, and the underlying insured cannot collect directly from the reinsurer.
The Department of Financial Services has also addressed the issue of New York-licensed brokers marketing materials from Bermuda that advertise the availability of insurance intended to cover punitive damages on risks located in New York State. The Department assumes that the insurance brokers in question are properly licensed to do business in New York State and that they are either excess line brokers themselves or are utilizing the services of licensed excess line brokers to access the unauthorized insurers.
The Department of Financial Services' opinions on punitive damage coverage are based on the assumption that the reinsurance agreements are within the permissible scope of the reinsurer's licensing authority. These opinions do not apply to extra-contractual obligations, where a reinsurer provides coverage to a ceding insurer for liabilities arising from its handling of a claim under the underlying policy.
The Department of Financial Services continues to enforce the public policy on punitive damage coverage, despite the national trend towards allowing insurance coverage for punitive damages. New York is one of only two states that completely bar insurance for any punitive damages assessed.
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Frequently asked questions
No, New York prohibits the insuring of punitive damages as it is considered to be against public policy.
The Court of Appeals in 1979 determined that punitive damages were not insurable because they are designed to punish the wrongdoer and deter further misbehavior. If a defendant transfers the burden of punitive damages to an insurer, they do not suffer the intended punishment.
Yes, while New York prohibits licensed insurers from providing coverage for punitive damages, the Supreme Court of the United States has held that it is legal for insureds to purchase coverage beyond the borders of the state.
