By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on February 14, 2017
Punitive damages are assessed against a liable party in especially egregious circumstances as a form of punishment and as a means of deterrence, as opposed to compensatory damages, which serve the purpose of restitution. As such, the amount awarded for punitive damages may greatly exceed the amount of actual loss suffered by a plaintiff. When punitive damages are awarded against an insured, the questions that naturally arise are whether those punitive damages are covered and whether they were even insurable in the first place. In other words, will the insurance company be on the hook for their insured's punitive damages? What arguments can the insurers make to rid themselves of the liability of the insured's punitive damages? These questions often depend on the underlying facts that resulted in the assessment of punitive damages, the law of the applicable jurisdiction and the language of the relevant insurance policies. Therefore, it is imperative that insurance companies work closely with counsel not only to develop an effective litigation strategy after punitive damages have been awarded, but in drafting the insurance policies and relevant documents at the outset.
When Policy is Silent as to Punitive Damages
It is well settled law that insurance policies are strictly construed against the insurer and in favor of coverage. Therefore, if the policy does not expressly state whether or not it covers punitive damages, courts will likely look at other provisions of the policy to decide whether punitive damages are covered. For example, if the policy defines "loss" as "those sums actually paid as judgments or settlement," courts will likely interpret that provision to include punitive damages, even though punitive damages are not expressly mentioned. If this is the case, punitive damages will be covered to the extent allowed by law. To that end, it is imperative for insurers and their counsel to develop strategy in accordance with the applicable jurisdiction. More importantly, however, insurers must be extremely careful when drafting insurance policies and should include an express exclusion for punitive damages if it intends to exclude it from coverage.
Treatments Around the Country
The analysis of insurability of punitive damages inevitably turns on one issue: whether the punitive damages were assessed through direct liability or vicarious liability. The jurisprudence of different jurisdictions regarding insurability of punitive damages varies according to whether state law allows insurability for directly assessed punitive damages, vicariously assessed punitive damages, both or neither. For the most part, the courts' decisions are influenced by their degree of concern on public policy implications. Specifically, whether insurability will facilitate the commission of wrongful acts which punitive damages were designed to prevent and hinder deterrence.
For example, under Connecticut law, direct punitive damages are uninsurable, while vicariously assessed punitive damages are insurable. See Bodner v. United Services Auto. Ass’n, 610 A.2d 1212 (Conn. 1992); Avis Rent A Car System Inc. v. Liberty Mutual Insurance Co., 526 A.2d 522 (Conn. 1987); St. Paul Fire & Marine Insurance Co. v. Shernow, 610 A.2d 1281 (Conn. 1992) (holding that it is contrary to public policy to insure against punitive damages assessed as a result of intentional wrongful acts).
On the other hand, in New Mexico, punitive damages may be insurable regardless of whether they were assessed directly or vicariously. New Mexico law does not prohibit insurance coverage for punitive damages on public policy grounds; however, insurers are not obligated to provide coverage. An insurance contract by its express language may exclude coverage of punitive damages, and only "[w]here an insurance company fails to clearly exclude coverage of punitive damages and an insured reasonably expects such coverage" will a New Mexico court construe the contract against the insurer. Rummel v. St. Paul Surplus Lines Insurance Co., 945 P.2d 985, 988 (N.M. 1997). See also Mid-Continent Cas. Co. v. I & W Inc., No. 2:11-CV-00329, 2015 WL 10818840, (D.N.M. 2015). The court in I & W Inc. held that punitive damages were covered in the absence of language in the policy that would act to exclude coverage for punitive damages. Id. That court specifically held that "no New Mexico public policy exists against insuring for punitive damages." Id at 7.
In New York, neither type of punitive damages are insurable. Punitive damages arising from direct liability are not insurable. Pub. Serv. Mut. Insurance Co. v. Goldfarb, 425 N.E.2d 810 (N.Y. 1981). In Golfarb, the court held that a dentist alleged to have sexually abused patient cannot look to an insurer for indemnification of punitive damages if the jury finds he acted with intent, and thus, the punitive damages would be assessed through direct liability.
Punitive damages arising from vicarious liability are also uninsurable in New York. Zurich Insurance Co. v. Shearson Lehman Hutton Inc. 84 N.Y.2d 309 (N.Y. 1994). In Zurich, the court rejected to follow the position of many jurisdictions that punitive damages assessed as a result of vicarious liability should be insurable. Id at 320. The Zurich court cited public policy reasons for its holding. Specifically, that New York's position is that "the imposition of vicarious punitive damages can significantly advance the deterrence goal by motivating an employer adequately to supervise its employees …" Id.
In Virginia, directly assessed punitive damages are insurable. Lipscombe v. Sec. Insurance Co. of Hartford, 189 S.E.2d 320 (Va. 1972). The relevant Virginia statute states, "[i]t is not against the public policy of the Commonwealth for any person to purchase insurance providing coverage for punitive damages arising out of the death or injury of any person as the result of negligence, including willful and wanton negligence, but excluding intentional acts." Va. Code Ann. § 38.2-227. Thus, directly assessed punitive damages are insurable, as long as they do not arise from intentional acts. Virginia courts have further limited this statute so it does not apply to property damage cases. U.S. Fire Insurance Co. v. Aspen Bldg. Corp., 367 S.E.2d 478, 480 (Va. 1988).
Moreover, in cases where punitive damages coverage is applicable (e.g., death or injury as a result of negligence), Virginia's Supreme Court has been clear that if the policy language does not expressly exclude punitive damages, the policy will be construed against the insurer and in favor of coverage for such punitive damages. United Servs. Auto. Ass'n v. Webb, 369 S.E.2d 196, 199 (Va. 1988).
However, Virginia's treatment of punitive damages assessed vicariously is ultimately nonexistent because the state does not allow for an award of punitive damages arising from vicarious liability. The Supreme Court of Virginia has held that "exemplary or punitive damages are awarded not by way of compensation to the sufferer but by way of punishment to the offender, such damages can only be awarded against the one who has participated in the offense. Dalton v. Johnson, 129 S.E.2d 647, 651 (Va. 1963) citing Hogg v. Plant, 133 S.E. 759 (Va. 1926). Therefore, an analysis of whether Virginia allows the insurability of vicariously assessed punitive damages is inconsequential, as punitive damages may not be awarded through vicarious liability in Virginia.
Treatment in Florida
Pursuant to Florida Statute Section 768.72(2), a defendant can only be held liable for punitive damages if the trier of fact determines, based on clear and convincing evidence, that the defendant was personally guilty of "intentional misconduct" or "gross negligence." Moreover, punitive damages may be imposed for the conduct of an employee or agent only if the conduct is "intentional" or "grossly negligent" and the employer actively and knowingly participated in such conduct.
Subject to certain statutory exceptions, an award of punitive damages may not exceed the greater of: (1) three times the amount of compensatory damages awarded to each claimant entitled thereto, consistent with the remaining provisions of the governing statute; or (2) the sum of $500,000. Fla. Stat. s 768.73(1)(a). However, where the court determines that the defendant's wrongful conduct was motivated solely by unreasonable financial gain and determines that the unreasonably dangerous nature of the conduct, together with the high likelihood of injury resulting from the conduct, was actually known, it may award an amount of punitive damages not to exceed the greater of: (1) four times the amount of compensatory damages awarded to each claimant entitled thereto, consistent with the remaining provisions of the governing statute; or (2) the sum of $2 million. Fla. Stat. s 768.73(1)(b), (c). Last, if the court determines that at the time of injury the defendant had a specific intent to harm the claimant and determines that the defendant's conduct did in fact harm the claimant, there is no cap on punitive damages. Fla. Stat. s 768.73(1)(d).
Florida's statutory law removing a ceiling on punitive damages for intentionally malicious harm suggests that any proportional ratio analysis required in negligence or business practices cases with only modest monetary or financial loss, would be incongruent when the claim involves the intentional infliction of malicious harm to an individual. Under Florida law applying to intentionally malicious harm, punitive damages are tied to unusually reprehensible misconduct, rather than some ratio relating to compensable losses. This statute gives all who would consider such misconduct here clear warning that for intentional and malicious harm they can lawfully be punished to the extent of their personal ability to pay. Lawnwood Medical Center v. Sadow, 43 So.3d 719, 725 (Fla. 4th DCA 2010).
A punitive damage award is also subject to the full three-part analysis set forth by the United States Supreme Court in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003). The three-part analysis articulated in State Farm requires the court to review: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. Id. 538 U.S. at 418. The State Farm case made clear that if the harm was only economic, reprehensibility would turn on whether the tortious conduct "evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident." State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003).
Standards for Coverage
In Florida, public policy prohibits insurance coverage of punitive damages for an insured’s active wrongdoing in order to maintain the punitive and deterrent purpose of punitive damages. U.S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061, 1064 (Fla. 1983) (“The Florida policy of allowing punitive damages to punish and deter those guilty of aggravated misconduct would be frustrated if such damages were covered by liability insurance.”); Nicholson v. American Fire & Cas. Insurance Co., 177 So. 2d 52 (Fla. 1965). Therefore, an insurer is not authorized to indemnify an insured with regard to the insured’s direct liability for punitive damages.
However, Florida public policy does not preclude insurance coverage of punitive damages when the insured is not directly at fault, but merely vicariously liable for another's wrongdoing. Bould, 437 So. 2d at 1064; Sterling Insurance Co. v. Hughes, 187 So. 2d 898, 900 (Fla. 3d DCA 1966). In this regard, the specific provisions and terms of the insurance policy will dictate whether an insurer must actually afford coverage to an insured for its vicarious liability for punitive damages. See First Specialty Insurance Co. v. Caliber One Indemnity Co. , 988 So. 2d 708, 712-713 (Fla. 2d DCA 2008) (policy’s coverage for damages included compensatory damages but not punitive damages). Therefore, it is well settled Florida law that punitive damages for an insured's direct liability are excluded from coverage but punitive damages for an insured's vicarious liability may be covered, depending on the language of the policy. As such, whether or not punitive damages are covered will often depend on the factual basis for their award and the policy language.
With regard to the burden to prove coverage for punitive damages on the basis of a jury verdict, the Florida Supreme Court held that the burden is on the insurer to show that the verdict of punitive damages was based on direct liability in a case where both the insured and its employee were defendants. Bould, 437 So. 2d 1061. There is also a Florida case in which the court indicated that an insurer should be permitted to intervene after an award of punitive damages for the limited purpose of submitting a special interrogatory on whether the award is based on direct or vicarious liability. Employers Insurance of Wausau v. Lavender, 506 So. 2d 1166 (Fla. 3d DCA 1987).
Furthermore, while punitive damages assessed against an employer under a vicarious liability theory may be insured, the insurer is relieved of the responsibility to provide coverage where the insured's fault constitutes gross negligence or willful and wanton misconduct. Highlands Insurance Co. v. McCutchen, 446 So.2d 1073 (Fla. 1984).