Are Punitive Damages Covered by Liability Insurance?
Punitive Damages Are a Punishment for Bad Business Behavior
Punitive damages (also called exemplary damages) may be awarded in a tort claim in addition to compensatory damages. They are intended to punish the defendant for committing an intentional or egregious act that caused harm to someone. Punitive damages are also designed to discourage others from committing similar types of acts.
Governed by State Law
State laws determine whether and when punitive damages may be awarded. The laws vary widely. Many states impose one or more of the kinds of restrictions outlined below.
- Allowed or prohibited. Three states prohibit punitive damages entirely. The remaining states allow such damages to be awarded in certain situations.
- Proof required. Most states require plaintiffs to meet a higher bar of proof for punitive damages than for compensatory damages. Compensatory damages are typically awarded when the defendant has been found liable by a preponderance of the evidence. In many states, the plaintiff isn't eligible for punitive damages unless he or she provides clear and convincing evidence that the defendant acted egregiously.
- Type of conduct. Each state has its own standards regarding the types of conduct that warrant punitive damages. For example, a state may require the plaintiff to prove that the defendant intentionally caused injury, acted with malice, committed fraud, or acted with willful or wanton disregard of the interests of others.
- Amount. Many states impose restrictions regarding the amount of money a plaintiff may receive. More than half the states limit punitive damages to a specified dollar amount or a certain multiple (such as two or three times) the amount of compensatory damages.
- Employer liability. Some states allow punitive damages against employers who have been found "vicariously liable" for egregious acts committed by their employees. Others permit such damages only if the employer knew the worker was unfit, authorized or participated in the behavior, showed malice, or committed fraud or some other reckless act.
A jury, judge, or appellate court (if a case is appealed) decides whether a plaintiff receives punitive damages, and if so, and the amount paid.
Are Punitive Damages Insurable?
Whether punitive damages are covered by insurance depends on two things: state law and policy language.
The laws regarding the insurability of punitive damages vary from state to state. Twenty-three states permit insurance coverage for punitive damages assessed against the party that committed the egregious act. Some of these states bar insurance if the act was intentional.
Some states prohibit insurance coverage for punitive damages levied against the wrongdoer. They contend that punitive damages won't serve their intended purpose (to punish the perpetrator) if they are paid by an insurance company. Many of these states do allow insurance to cover punitive damages against an employer based on vicarious liability. In this situation, the employer didn’t commit the bad act so the damages aren’t intended as punishment.
Many liability policies purchased by small businesses are silent about punitive damages. Examples are the ISO general liability, business owners, and business auto policies. None of these policies mentions punitive damages.
One commonly-used policy that does address punitive damages is the standard NCCI workers compensation policy. Part Two of the policy, Employers Liability Coverage, excludes punitive or exemplary damages because of bodily injury to an employee employed in violation of the law. It also excludes punitive damages with regard to benefits the employer is obligated to provide under maritime law.
Many errors and omissions and specialty liability policies explicitly cover or exclude punitive damages.
For example, the Integrated Tech (media liability) policy offered by Philadelphia Insurance covers punitive damages via its definition of the word “damages.” However, the definition of “damages” in Philadelphia’s Allied Healthcare Providers Professional Liability policy excludes punitive damages. Most (but not all) D&O policies cover punitive damages while many medical malpractice policies exclude them.
Policies vary widely so it is important to read the documents carefully.
How to Tell Whether Punitive Damages Are Covered by Your Insurance
How can you tell whether a policy covers punitive damages? The first step is to look for an explicit exclusion. Punitive damages may be excluded separately or in combination with other types of loss like fines and penalties.
Some policies contain multiple sets of exclusions. Be sure to read all exclusions in the policy.
Next, look at the policy definitions section. Some policies cover or exclude punitive damages via their definition of certain terms, particularly damages or loss. For instance, a policy might state that loss means (among other things) compensatory damages, punitive or exemplary damages, and the multiple portion of any multiplied damage award.
Suppose the policy makes no reference to punitive damages. This is not uncommon. As noted previously, many liability policies don't address punitive damages at all. When punitive damages aren't explicitly excluded, they are generally presumed to be covered.