Outcomes Not Consistent State-to-State

Summary: This discussion examines issues regarding the insurability of punitive damages awards under liability policies. Dependent upon the jurisdiction, there are three positions which have been adopted regarding whether or not an insured can collect under a general liability policy for punitive damages awarded against him or her. In some states, punitive damages are flatly not insurable as a matter of public policy. In others, the courts have held that the language of the insurance contract controls, and, absent an exclusion of punitive damages awards, they are insurable. Yet another position is that punitive awards vicariously assessed against an insured are insurable. The determination of whether or not punitive damage awards are recoverable under liability policies is dependent upon the specific jurisdiction.

Topics covered:
What are punitive damages?
“Damages” under liability policies
Insurers' reasoning against coverage
Matter of public policy
Policy provisions defeating coverage
Vicarious liability
Punitive versus statutory multiple damages
Entitled to select counsel
Uninsured motorists coverage and punitive damages
Uninsured/underinsured motorists punitive damages exclusion
Conflict of laws

What Are Punitive Damages?

At one time, the most an injured party could hope was to have damaged property restored, medical needs attended, and, in short, to be “made whole” (restored to pre-loss condition) after a loss. As the law evolved, however, courts became concerned that merely compensatory awards did not actually restore the person to the same condition as before the accident; there was the matter of legal fees, of pain and mental anguish, and other factors, which mere compensation did not reach. In order to rectify this situation, awards began to be more than strictly compensatory and, as justification, the added amounts were sometimes labeled “punitive.”

Today, most of the items which punitive damages originally aimed to include are commonly regarded as compensatory. Nevertheless, the term remains, as do the awards, but the emphasis has shifted from being a device for providing additional compensation to become more a means of punishment and deterrence. Punitive damages, or “exemplary” damages, are awards typically rendered by juries and which are over and above the amount required by the injured person as compensation. Punitive damage awards take on a quasi-criminal element in a civil action. These damages are awarded either under the common law or by statute to punish the tortfeaser for egregious conduct, and they are generally awarded to deter the tortfeaser and the public at large from committing similar offenses in the future.

An early Florida court decision, Kress & Co. vs. Powell, 180 So. 757 (1938), explains the distinction between compensatory and punitive damages awards that is now most commonly accepted. “Compensatory damages arise from actual and indirect pecuniary loss, mental suffering, value of time, actual expenses, and bodily pain and suffering. Exemplary, vindictive or punitory damages are such as blend together the interests of society and of the aggrieved individual, and are not only a recompense to the sufferer but also a punishment to the offender and an example to the community.”

Punitive damages are usually imposed when the related conduct is intentional, malicious, or consists of action or inaction that is so grossly willful, or which indicates a conscious, aggravated disregard of others. Note that a specific award for punitive damages can stand only if the jury or judge holds the offender to have been more than merely negligent. “Wanton and willful disregard of consequences,” “outrageous or anti-social behavior,” or “gross negligence” are expressions often joined with the award.

“Damages” under Liability Policies

The question of whether punitive damages awards are covered by liability policies arises because liability policies generally do not define the “damages” contemplated in the insuring agreement. Therefore, the matter of coverage for such awards is determined by contract interpretation and public policy. The exact phrasing in the Insurance Services Office (ISO) CGL form reads:

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.

Further, liability policies ordinarily do not contain anything in the way of an exclusion pertaining to one type of damages versus another. ISO issued a punitive damages exclusion in the mid-1980s, but withdrew it after industry criticism. Some independently filed liability policies do still contain such an exclusion, and they have generally been upheld to validly eliminate coverage for punitive portions of awards. See “Policy Provisions Defeating Coverage.”

Consequently, most of the courts faced with the question of whether the phrase “all sums that the insured becomes legally obligated to pay as damages” indicate that, based on the language of the policy, they would hold the insurer responsible for payment of both compensatory and punitive damages. Those courts that hold punitive damages uninsurable as contrary to public policy generally admit that the language of the insurance policy allows coverage but that public policy is the stronger consideration.

A case typifying support for insurance coverage of punitive damages due to the language of the policy is the West Virginia Supreme Court decision in Hensley v. Erie Insurance Co., 283 S.E.2d 227 (1981). In Hensley, which involved an intoxicated driver, an injured party, and a punitive damages award, the court held the insurance carrier liable for punitive damages, stating, “An insurance policy which requires construction must be construed liberally in favor of the insured.” The court noted that the liability policy language promised to pay all sums, with only damages by intentional acts excluded. Gross, reckless, or wanton negligence were held to be covered. Further, the court held the public policy of the state did not exclude insurance coverage for punitive damages.

Not all states' courts agree that coverage for all damages—compensatory and punitive—is implicit in the wording of the policy. Among those are the courts' decisions in Crull vs. Gleb, 382 S.W.2d 17 (Mo. Appellate Court; 1964); Caspersen v. Webber, 213 N.W.2d 327 (Minn. Supreme Court; 1973); and Schnuck Markets Inc. v. Transamerica Insurance Co., 652 S.W.2d 206 (Mo. Appellate Court; 1983).

In Crull, an action to recover punitive damages under an automobile liability policy, the court stated without discussion, “There is no language in the policy that provides for the payment of judgments for punitive damages. The policy covers only damages for bodily injury and property damages sustained by any person. Punitive damages do not fall into this category.” Reaching the same conclusion in Caspersen, the Minnesota Supreme Court wrote, “Punitive damages are not within the coverage of an insurance policy requiring the insurer to 'pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury.'”

Ten years later, Schnuck gave the Missouri judiciary an opportunity to reexamine the reasoning of the Crull decision. The trial court had determined the insurer to be responsible for the punitive damages award assessed against its insured, and the appellate court disagreed and reversed the decision. According to the court, “The meaning of the words has not changed within the last 20 years. Thus, unless the Crull interpretation is foolish or irrational, there is no sense in now construing the same language inconsistently and ignoring the Crull's interpretation. We find there is a rational basis underpinning the court's construction in Crull.”

Depending on the jurisdiction, any of five positions may be applicable relative to the awarding of punitive damages or insurance covering them: (1) state law or judicial interpretation may not allow punitive damages awards at all; (2) punitive damages awards may be permitted and, so too, recovery of punitive damages under liability policies; (3) punitive damages awards may be permitted but insurance against them prohibited as contrary to public policy; (4) insurance may be allowed in some circumstances but not others (as in Missouri, where, contrary to the general policy of that state, police officers' punitive damages are insurable); or (5) the situation may be yet undecided in the state in which the claim originates.

Insurers' Reasoning against Coverage

Insurers generally advance the theory that, for public policy reasons, punitive damages are not payable under insurance policies, even in the absence of a specific punitive damages exclusion. The argument most often advanced by insurers against coverage of punitive damages awards is that punitive damages are designed to punish; that it is the business of insurance to provide compensation to the victim but not to mitigate the punishment of the offender.

Representative of this issue is the 1981 Illinois case Beaver v. Country Mutual Insurance Co., 420 N.E.2d 1058. In reversing the lower court's ruling holding the insurance company liable for an insured's punitive damages, the court ruled the function of punitive damages awards is similar to a criminal penalty, i.e., punishment and deterrence, and so may not be passed along to an insurance company. The court wrote, “Where a person is able to insure himself against punishment he gains a freedom of misconduct inconsistent with the establishment of sanctions against such misconduct. And there is no point in punishing the insurance company; it has done no wrong.” The reasoning of the Beaver case was upheld by a United States District Court of Illinois in Affiliated FM Insurance Co. v. Beatrice Foods, 645 F.Supp. 298 (1985).

However, the above argument has been set aside in cases where a jury makes an award combining punitive and compensatory damages, requiring payment by the insurer of the entire amount. Because juries have wide powers of discretion when it comes to allowing punitive awards, higher courts have refused to guess how a lump sum is to be divided. Pennsylvania Threshermen & Farmers Mutual Casualty Co. v. Thornton, 244 F.2d 823 (1957) is a frequently cited South Carolina case in which the lump sum award is discussed and the case resolved in favor of coverage.

Insurers have also argued historically that punitive damages—brought on as they are by “wanton, willful, etc.,” acts of the insured—are not covered by virtue of the common exclusion dealing with intentional acts. This argument has been little used since the 1921 New York case Messersmith v. American Fidelity Co.,(133 N.E. 432). The Messersmith court reasoned that no matter how gross the negligence, a distinction must be made between an act that is careless and one that is deliberate, only the deliberate act being uninsurable due to the exclusion. Where there is clear evidence of intent on the part of the insured to harm another, the insurer is relieved not only of any punitive damages award but of all responsibility. Cases citing Messersmith include McGroarty v. Great American Ins. Co., 329 N.E.2d 172 (New York, 1975) and Martinkowski v. Carborundum Co., 437 N.Y.S. 2d 237 (1981).

Scott v. Instant Parking, Inc., 245 N.E.2d 124 (1969) , on the other hand, held that a policy obligating insurer “to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury…sustained by any person, caused by accident” included injuries caused by willful and wanton misconduct, and, since punitive damages may be allowed in such a case, they were a part of “all sums” which insured became liable to pay and thus were covered by policy.

Matter of Public Policy

Courts have not been able to agree on the appropriateness of coverage for punitive damages under liability insurance policies because of the public policy question. Most courts today agree that punitive damages are generally awarded to deter the tortfeasor and the public at large from committing similar offenses in the future. The question then becomes, if punitive damages are a device by which society punishes its wrongdoers, then what end is served if the “punishment” is distributed back through society through an insurance mechanism? And, as a matter of deference, how much could be expected if offenders are able as a matter of policy to pass along “smart money” judgments to insurance companies, who have committed no offense?

As the court pointed out in the previously mentioned Beaver case, “In actual fact the burden would ultimately come to rest not on the insurance companies, but on the public, since the added liabilities would be passed along to the premium payers. Society would then be punishing itself for the wrong committed by the insured.”

The Texas court in Dairyland County Mut. Ins. Co. v. Wallgren, 477 S.W.2d 341 (Tex.Civ.App., 1972) and the Georgia court in Greenwood Cemetery, Inc. v. Travelers Indem. Co., 232 S.E.2d 910 (Ga. 1977) explained that putting the responsibility for the resolution back on the insurance department as authority for the existence of insurance, represents a solution, perhaps, for the courts if not for insurance professionals and their customers. The same can be said of the Arizona court's recognition in Price v. Hartford Acc. & Indem. Co., 502 P.2d 522 (Ariz. 1972) of more than one “public policy.” But the real problem lies in the fact that there is no nationally accepted agreement on the doctrine of punitive damages.

In a few jurisdictions, such as Florida, such awards are forbidden. In others, they are upheld as necessary to the good of society, punishing the guilty and deterring others from similar action; consequently, insurance is not allowed. Most states do not address the question of punitive damages in their statutes, leaving it to the courts to decide whether the punitive effect is to be upheld or if insurance is to be permitted. (One state that has statutorily addressed the insurability of punitive damages awards is Virginia. This state passed a law in 1983 stating it is not against the public policy of the state for a person to purchase insurance providing coverage for punitive damages awards.)

This issue continues to be argued, and insurers have been obligated to pay in some states and excused from doing so in others. States holding against insuring punitive damages awards cite Northwestern National Casualty Co. v. McNulty, 307 F.2d 432 (1962); while jurisdictions holding for insurance coverage generally turn to Lazenby v. Universal Underwriters Insurance Co., 383 S.W.2d 1 (1964) as precedent. The cases, though similar, have opposite outcomes.

In McNulty, the insurance policy involved was a combination family automobile policy pledging “to pay on behalf of the insured all sums, etc.” The policy was issued in Virginia, where the insured resided, and the accident occurred in Florida. The insured, while intoxicated and traveling 80 miles per hour, crashed into the rear of the plaintiff's car and left the accident scene. The jury returned a verdict of $37,000 in compensatory damages and $20,000 in punitive awards. On appeal, the insurer's argument that the language of the policy did not cover punitive damages awards was not even considered by the court. “We find it unnecessary to construe the contract; we hold that should a policy provide specifically for such coverage it would contravene public policy.” The court held that the most widely accepted basis for punitive damages awards in other jurisdictions was that punitive damages are imposed as a means of punishment and deterrence, concluding, “There are especially strong public policy reasons for not allowing socially irresponsible automobile drivers to escape the element of personal punishment and punitive damages when they are guilty of reckless slaughter or maiming on the highways.”

McNulty has been followed by the more recent cases DuBois v. Arkansas Valley Dredging Co., 651 F.Supp 299 (United States District Court, applying Louisiana law, 1987); Dorsey v. Continental Casualty Co., 730 F.2d 675 (Fla. 1984); and Celotex Corp. v. AIU Ins. Co., United States Bankruptcy Ct., Fla., (1993).

The Lazenby case, conversely, presented the Tennessee Supreme Court with the same problem—and resulted in an opposite conclusion. The liability insurer was required to pay the punitive damages of the insured, the court emphasizing what is viewed as the practical aspects of the case, i.e., that the denial of insurance for punitive damages in unlikely to deter anyone. The court further argued that a contrary ruling would run counter to the expectation of the average policyholder. “Moreover,” the court added, “the insurance contract is a private contract between defendant and their assured which when construed as written would be held to protect him against claims for both compensatory and punitive damages. Then to hold assured, as a matter of public policy, is not protected by the policy on a claim for punitive damages would have the effect to partially void the contract.”  Seen at base is the wording of the insurance contract versus the provisions guarding public policy. With few exceptions, court cases following the McNulty and Lazenby decisions base their outcomes on one or the other of these two cases.

Lazenby was affirmed by the decisions in Mullins v. Miller, 683 S.W.2d 669 (Tenn., 1984) and Emerson v. Garner, 732 S.W.2d 613 (Tenn., 1987).

Policy Provisions Defeating Coverage

Most courts that have examined the agreement to pay “all sums the insured shall become legally obligated to pay as damages because of bodily injury,” have ruled that the language applied to punitive damages as well as to compensatory. In the mid-1970s, the insurance industry sought to resolve the question by means of a punitive damages exclusion in liability policies under the sponsorship of Insurance Services Office. There was, however, substantial pressure against such an exclusion from industry and consumer groups and, after only a few months, the exclusion was withdrawn. Though ISO withdrew its punitive damages exclusion, some insurance companies filed the exclusion independently and still include it in their policies. There is no reason to doubt its validity, when used, even in states that allow insurance for punitive damages. Such a provision was held to be valid and enforceable in Lincoln National Health and Casualty Co. v. Brown, 782 F. Supp. 110, (U.S.D.C., Ga., 1992).

One case where a unique phrasing (though not a specific exclusion) in the insuring agreement was held not to cover punitive damages is Cavins v. Atlantic Mutual Insurance Co., 220 S.E. 2d 403 (1975). The case involved personal injury liability coverage under a special multi-peril policy. In this form, the agreement was partially altered so that “to pay as damages because of bodily injury” read “to pay as damages because of injury (herein called 'personal injury').”  Moreover, the word “damages” was subject to an amended definition wherein it was specified that the term meant “only those damages which are payable because of personal injury arising out of an offense to which insurance applies.” The court held the insurance company was not responsible for the insured's punitive damages, reasoning that the rule that insurance contracts are to be construed most strongly against the insurer and most liberally in favor of the insured “does not extend so far as to authorize the court to rewrite the policy, either by striking out language which it contains or by adding clauses which it does not have.”

As previously noted, the exclusion of damages for injuries which are intended or expected may be argued as eliminating coverage for punitive damages. However, as noted in Messersmith, negligence, no matter how gross, does not rise to the level of an intended act.

Vicarious Liability

The insurability of vicarious punitive damages awards—where another party, a parent or employer, for example, is held liable for the “outrageous” conduct of another—can also vary according to the interpretations of different jurisdictions. There is, however, a tendency for courts to be more lenient in allowing recovery from insurance companies in vicarious damages actions than where punitive damages awards are directly imposed.

For example, in the Florida case Sterling Insurance Co. v. Hughes, 187 So. 2d 898 (1966), a liability policy was held to cover both compensatory and punitive damages in a judgment against an employer arising out of assault and battery committed by an employee. To the same effect, in the Scott case cited earlier, the Illinois Appellate Court held an insurer liable for the punitive damages imposed because of the insured's employee. According to the court, “This case involves the right of a corporation to insure against liability for punitive damages caused by its agents and servants. There is no reasonable basis to declare the latter type of insurance is against public policy.” Courts in both Florida and Illinois have ruled against coverage of punitive damages awards imposed directly on an insured.

Conversely, some states that do not allow insuring punitive damages awards will not allow insurance for vicariously imposed punitive damages settlements, either. In Lindsey v. Miami County Nat. Bank, 984 P .2d 719 (Kan., 1999), the court held insuring vicarious punitive damages to be against public policy. The case involved the “negligent and reckless acts” of a corporate officer in handling a title transaction for which the court imposed compensatory and punitive damages awards. The title company's insurer was relieved of liability for the punitive damages portion of the settlement, the state's supreme court ruling that, “It is against the public policy of this state to allow a wrongdoer to purchase insurance to cover punitive damages, and we interpret that rule to include any person who has incurred such liability regardless of whether the liability resulted from the insured's own acts or those of his employee, servant or agent.”

Currently, every state that allows insurance for punitive damages is presumed also to allow, by extension of the principle, insurance against vicarious liability for punitive damages.

Punitive versus Statutory Multiple Damages

A related but slightly different type of award in excess of compensatory damage is that of multiple damages provided by statute. A Wisconsin Supreme Court decision, Cieslewicz v. Mutual Service Casualty Insurance Company, 267 N.W. 2d 595 (1978), determined that treble damages awarded under a state law relative to attack by a dog known by its owner to have previously bitten someone else were covered under the owners liability policy.

The court, while declining to declare itself on the question of insurability of punitive damages in Wisconsin, made three distinctions between common law punitive damages and statutory multiple awards. First, there is the differing level of culpability required to warrant the additional damages. In the multiple statute involved, no particular state of mind or outrageous character of conduct is necessary. The law allows treble damages whether the dog is known to be violent or is normally gentle but has had one prior incident.

A second distinction is in the mode of assessment of damages. Common law punitive damages are assessed at the discretion of the jury with no absolute entitlement of the insured part to punitive damages. Multiple damages on the other hand are assessed whenever the statutory requirement is met, and the entitlement is on that showing alone.

A third distinction is in the method of calculating damages. In punitive damages the wealth of the defendant has an important bearing on the size of the awards, whereas statutory multiple damages are an automatic multiplier of the compensation damages as set forth by the statute.

In Connecticut, a similar question involving statutory triple damages, invokable at the discretion of the judge, was decided in Tedesco v. Maryland Casualty Co., 18 A.2d 357 (1941). Here, the additional statutory damages imposed by the judge were held not to be covered by insurance. Tedesco stands for the proposition that a tortfeasor may not protect himself from liability by seeking indemnity from his insurer for damages, punitive in nature, that were imposed on him for his own intentional or reckless wrongdoing. In another case on point, however, the court determined that a claimant who had been held liable for punitive damages as the alter ego of the tortfeasor was not barred, as a matter of public policy, from recourse to its insurance coverage. Avis Rent A Car System, Inc. v. Liberty Mutual Ins. Co., supra, 203 Conn. at 674, 526 A.2d 522. The court distinguished Tedesco from Avis because the claimant in Avis, had suffered an insurable risk by its liability being statutorily assigned rather than having been assigned as punishment for his own wrongdoing. See generally, G. Priest, “Insurability and Punitive Damages,” 40 Alabama L.Rev. 1009, 1033 (1989) and Bodner v. United Services Auto. Ass'n, Conn., June 16, 1992.

Entitled to Select Counsel

One other aspect of punitive damages to bear in mind has to do with the representation of the insured in punitive damages actions. Generally, under liability provisions, the counsel is selected by the insurance company under its obligation to defend. However, in instances where there are multiple lawsuits and enormous requests for both punitive and compensatory damages, some courts have found a conflict of interest on the part of the insurance company, who may seek to minimize compensatory awards at the expense of the punitive awards for which they may not be held liable. These courts have authorized insureds to select their own defense team.

In Parker v. Agricultural Insurance Co., 440 N.Y.S.2d 964 (1981), a New York court ruled that the insured had the right to select counsel at the insurer's expense in several tort actions involving substantial punitive damages. The plaintiff, a management firm against which seven lawsuits had been brought arising out of the explosion and fire from an apparent gas leak at premises managed by the firm, brought a declaratory judgment action seeking a declaration that it had the right to select and substitute its own counsel in the underlying tort actions and to have such substituted counsel paid by its insurers. The court held that where in the underlying suits in which insured was charged with willful and wanton misconduct, punitive damages were sought in total sum of $169,000,000 and compensatory damages were sought in the sum of $26,000,000, where insurers were precluded from providing coverage for punitive damages, and where there existed a conflict of interest arising because of punitive damages claims, the insured was entitled to choose counsel and to control all litigation, reasonable expense of which would be borne by the primary insurer and, should it become necessary, by excess carriers as apportioned in their policies. The court noted that an insurer's duty to defend is normally accompanied by a right to control the litigation; however the court found that in this case the insured's interest was sufficiently greater than the insurer's to warrant the insured's selection of counsel.

In another case involving similar facts, the New York Court of Appeals also affirmed the right of an insured to select his own counsel where potential conflict of interest is involved. In Public Service Mutual Insurance Co. v. Goldfarb, 425 N.E.2d 810 (1981), a case involving professional malpractice of a dentist, the court held, “Independent counsel is only necessary in cases where the defense attorney's duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds, which would render the insurer liable. When such a conflict is apparent, the insured must be free to choose his own counsel whose reasonable fee is to be paid by the insurer.”

Note that not every situation involving a complaint which seeks punitive damages triggers an obligation on the part of the insurer to provide the insured with independent counsel at insurer's expense. As the California Court of Appeals explained in Golden Eagle Ins. Co. v. Foremost Ins Co., 20 Cal.App.4th 1372 (1993), “The duty to appoint independent counsel because of conflict of interest is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests.”

Uninsured Motorists Coverage and Punitive Damages

Courts have also had to address the issue of whether punitive damages awards assessed against a grossly negligent or intoxicated driver are recoverable under the uninsured motorists' coverage of the not-at-fault injured party. Not surprisingly, jurisdictions have come to conflicting outcomes.

Louisiana is a state that permits recovery of punitive damages under the insured party's uninsured motorists' coverage. This is illustrated in Sharpe v. Daigre, 545 So.2d 1063 (La. App., 5th Cir., 1989), in which an intoxicated driver rear-ended another vehicle, resulting in serious injuries. Prior to trial, the at-fault driver and his auto insurer settled for the policy limits of $100,000. However, the plaintiff reserved his rights against all other parties, including two insurance companies with which he had uninsured motorists coverage, and proceeded to trial. The court awarded an additional $94,000 in compensatory and $28,000 in punitive damages against the insured's uninsured motorists coverage carriers. The trial judge struck the punitive damages award from the judgment, as he ruled the uninsured motorists coverage contract did not cover punitive damages.

The injured driver appealed and an appeals court reversed the decision, holding punitive damages to be covered by uninsured motorists coverage. In reaching its decision, the court relied on the following language from Johnson v. Fireman's Fund Ins. Co., 425 So. 2d 224 (La.1982).

[W]hen an insured motorists carrier becomes liable under its policy, it is required to pay damages within the meaning of the [the uninsured motorists statute] to the person protected. Although uninsured motorists coverage is provided for the protection of persons injured by uninsured or underinsured tortfeasors, and not for the benefit of such wrong-doers, the statutorily specified coverage guarantees the injured person's recovering of damages as if the tortfeasor had been insured. Subject to conditions not granted the tortfeasor, the uninsured motorists carrier is independently obliged to repair the damage which the tortfeasor has wrongfully caused.

Therefore, since the uninsured driver would be obligated for punitive damages under state law, so is the uninsured motorists insurer. Further, the court held that the release of the at-fault driver and his insurer has no effect on the outcome.

In Baker v. Armstrong, 744 P.2d 170 (1987), the New Mexico Supreme Court reach the same conclusion, adding that the insurance company, after paying the award, could seek recovery from the uninsured tortfeasor. “Because the tortfeasor would experience the intended punishment by having to pay the punitive damages award,” the court stated, “the policy underlying punitive damages would not be undermined.”

On the other hand, other courts have found no coverage for punitive damages awards under the injured person's uninsured motorists' coverage. This is the holding of State Farm Mutual Automobile Insurance Co. v. Mendenhall, 517 N.E. 2d 341 (Ill., 1987). The Illinois Appellate Court looked to the uninsured motorists' statute, which is similar to the one in Louisiana and Ohio, and found the purpose of uninsured motorist coverage to be compensatory in nature. The purpose of punitive damages awards, the court held, is punishment and deterrence. Therefore, punitive damages awards are not included in uninsured motorists recovery in states taking this position. This court disagreed with the argument accepted by the New Mexico Supreme Court regarding subrogation as a punitive element. “Suggest[ing] that the offending driver might be punished if State Farm was successful in a subrogation claim…is wild-eyed conjecture which lacks practical application.” The court found the uninsured motorists/punitive damages issue without merit: The purpose of the uninsured motorists coverage is to compensate for bodily injury, sickness or disease, or death resulting therefrom. It is not intended to punish the insurance company for the wrong-doing of others.

Mississippi reached a similar conclusion in State Farm Mutual Automobile Ins. Co. v. Daughdrill, 474 So. 2d 1048 (1985), holding that the purpose of punitive damages is not accomplished in the uninsured motorist context in that an award against the insurer does not deter or punish similar future conduct and no punishment is imposed on the uninsured motorist.

Connecticut is another state where punitive damages are not covered by uninsured motorists' coverage. In Bodner v. United Services Auto. Ass'n, 222 Conn. 480 (1992), the court held that considerations of public policy did not entitle the uninsured motorist insured to common law punitive damages measured by attorney's fees to be assessed against his automobile insurer for pursuit of his claim against his insurer. The court concluded that insured was not entitled to punitive damages because he would not have been entitled to punitive damages had the uninsured motorist maintained his own policy of liability insurance, and insurer had no relationship, direct or indirect, to the tortfeasor nor to conduct underlying a claim for punitive damages.

Uninsured/Underinsured Motorists Punitive Damages Exclusion

In response to cases such as Johnson and Hutchison, Insurance Services Office (ISO) developed an exclusion for use in automobile policies' uninsured motorists provisions that clearly excludes punitive damages coverage in these types of cases. The courts had primarily found coverage in these cases due to the promise to pay all damages arising from uninsured motorists incidents without any qualifying exclusionary language. There is no reason to doubt the validity of these exclusions in policies that employ them.

However, not all states approved the use of this exclusion. Alabama, Kansas, Mississippi, New York, and Vermont disapproved the filing of the uninsured motorists punitive damages exclusion, and it was not filed in Virginia.

Conflict of Laws

The issue of conflicting laws of varying jurisdictions has arisen in relation to punitive damages awards and may be important to insureds whose primary place of business is in a state that does not recognize the insurability of punitive damages but that conducts business in states that do.

The question is one of whose law to apply. For example, in Home Ins. Co. v. American Home Products, 75 N.Y.2d 196 (1990), both the insurance company and the insured had their principle place of business in New York (although the insurance company is domiciled in New Hampshire and the manufacturer is domiciled in Delaware). A consumer injured by one of the manufacturer's products brought suit in Illinois, winning both compensatory and punitive damages (which are not insurable in Illinois). The insurer then brought suit in New York state court against its insured for a declaration that it be relieved from the punitive portion of the award. Because punitive damages are not insurable in New York, the New York Court of Appeals agreed with the insurance company and relieved the insurer of the punitive damages award. The holding may be narrow, however, as both the insurer and insured would have to have their principle place of business in the same jurisdiction to keep the suit in state rather than federal court. A federal court might adopt a different theory and apply the law of the state in which most of the transactions leading to the legal action took place.

A similar case, however, came to a different conclusion. In American Home Assurance Co. v. Safeway Steel Products Co., 743 S.W.2d 693 (1987), the insurance company's principle place of business was New York, the manufacturer's was in Missouri and the consumer injured by the manufacturer's product lived in Texas. The plaintiff brought suit for the injury in Texas state court, and the insurance company argued that either New York or Missouri law should be applied regarding the insurability of punitive damages.

The court adopted the “most significant relationship” test in deciding to apply Texas law to the decision. The court then looked to a Texas insurance law statute that states that any insurance contract payable to citizens of Texas by an insurance company doing business in Texas is held to be a contract entered into under the laws of Texas regarding insurance. Because punitive damages can be insurable in Texas, the court held the insurer liable for payment of them.

Similar conflict of laws cases may one day prompt an appeal to the United States Supreme Court regarding the insurability of punitive damages. At that time, the pronouncement of that body will become the law of all of the United States. Until that time, however, the states are free to adopt the position of their choosing.