The Insurance Services Office, Inc.,
commercial general liability (CGL) policy will not pay punitive damages
imposed on an insured. This is so because we believe it to be so—a matter of
Craig F. Stanovich
Austin & Stanovich
Risk Managers, LLC
The most common reason given for this belief is that punitive or
exemplary damages are always uninsurable
as a matter of law—public policy does not allow payment of such damages.
Some will also assert that the CGL policy does not provide coverage for
punitive damages, either because the CGL policy automatically includes an
express exclusion or because … well, it just doesn't cover punitive damages.
According to Black's Law Dictionary
(8th edition), punitive damages are assessed to penalize the wrongdoer or to
make an example to others. As a general matter, the purpose of awarding
punitive or exemplary damages, which are imposed
in addition to sums to compensate the
injured party for actual loss, is to punish and deter blameworthy conduct.
The nature of the conduct that permits juries to punish or make an
example of the defendant may vary considerably. At one end of the spectrum
is the view that punitive damages are awarded to punish conduct that is
tantamount to criminal behavior.
Exemplary or punitive damages … are authorized to be inflicted
when the wrong done partakes of a criminal character, though not punishable
as an offense against the state, or consists of aggravated misconduct or a
Winn & Lovett Grocery Co. v. Archer, 126
Fla. 308, 171 So. 214 (1936)
A little further along this spectrum is the view that punitive damages
are appropriate where the defendant's conduct constitutes
willful or intentional wrongdoing.
Such damages are allowed, after an award for compensatory
damages, in negligence cases when there has been some willful misconduct….
Lazenby v. Universal Underwriters Ins. Co.,
383 S.W.2d 1 (Tenn. 1964)
The misconduct we have in mind is intentional or malicious
Northwestern Nat'l Cas. Co. v. McNulty,
307 F.2d 432 (5th Cir. 1962)
And further along the spectrum still, punitive damages are awarded for
injuries for acts of gross negligence.
Thus, in North Carolina punitive damages may be awarded in
negligence cases for wanton or gross acts.
Mazza v. Medical Mut. Ins. Co. of N.C.,
319 S.E.2d 217 (N.C. 1984)
Whether by statute or caselaw, most states have addressed the issue of
the insurability of punitive damages—that is, deciding whether it is
contrary to public policy to allow insurance to pay punitive damages. But
the answers here are often complex. What is considered appropriate public
policy is a difficult question at best. Such conclusions require the
balancing of interests and are ever evolving. A simple "yes" or "no" usually
does not emerge.
The prohibition of the insurability of punitive damages based on public
policy typically hinges on the answer to one overriding question: whether
the purposes of punishment and deterrence are defeated by allowing insurance
to pay for such damages. Why punitive damages may be against public policy
is well explained in the seminal case of
Northwestern Nat'l Cas. Co. v. McNulty, 307 F.2d 432 (5th Cir. 1962):
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. It is not disputed that insurance against
criminal fines or penalties would be void as violative of public policy. The
same public policy should invalidate any contract of insurance against the
civil punishment that punitive damages represent.
… punitive damages are awarded for punishment and deterrence
would seem to require that the damages ultimately rest … on the party
actually responsible for the wrong. If the person were permitted to shift
the burden to an insurance company, punitive damages would serve no useful
In actual fact, of course, and considering the extent to which
the public is insured, the burden would ultimately come to rest not on the
insurance companies but on the public, since the added liability to the
insurance companies would be passed along to the premium payers. Society
would then be punishing itself for the wrong committed by the insured.
Several states view uninsured motorists (UM) or underinsured motorists
(UIM) coverage a bit differently as respects punitive damages. As UM and UIM
coverage is paid by the insurer of the innocent
party, most states have concluded that requiring payment of punitive
damages to the insured under UM or UIM coverage would not be justified.
… most jurisdictions holding that punitive damages are not
recoverable under the injured party's UM coverage also note that it would be
antithetical to require the UM carrier to pay a penalty assessed against the
wrongdoer, because the burden of payment would fall not upon the wrongdoer,
or even the insurer of the wrongdoer, but upon the insurer of the innocent
Kentucky Cent. Ins. Co. v. Schneider, 15
S.W.3d 373 (Ky. 2000)
A similar observation was made regarding UIM coverage, with the added
observation that the "statutory scheme" of the legislature did not intend
for the insurer to pay punitive damages to the insured.
We do not think that the Legislature, in devising a statutory
scheme by which the victim of an underinsured motorist may be compensated
for his or her losses, obligated the insurer to provide coverage for
punitive damages. Allowing recovery of punitive damages would not serve the
purpose of compensating the injured party … rather, it would result in
payment of punitive damages by a party who was not a wrongdoer.
Santos v. Lumbermens Mut. Cas. Co., 556
N.E. 983 (Mass. 1990)
Those states that disallow insurance for punitive damages often do
not apply the public policy prohibition
to punitive damages imposed on a person or organization for the actions of
another. In other words, punitive damages vicariously imposed may not be
against public policy to insure, even in those states that have concluded
that punitive damages are uninsurable for direct liability. In
McNulty, above, the court observed:
A different situation is present where the sole liability of the
insured arises out of the relation of master and servant. In this situation
where there was no direct or indirect volition upon the part of the master
in the commission of the act, no public policy is violated by protecting him
from the unauthorized and unnatural act of his servant. Public policy is not
violated by insurance in such a situation.…
The Supreme Court of Oklahoma considered punitive damages imposed
vicariously and commented:
In almost all jurisdictions which disallow insurance coverage
for punitive damages, an exception is recognized for those torts in which
liability is vicariously imposed on the employer for a wrong of his servant.
In that class of litigation, public policy does not inhibit a shift in
liability incidence to the insurer unless the employer's volition was either
directly or indirectly an element in the commission of the harm. We are in
accord with this view and hold that public policy against insurance
protection for punitive damages does not preclude recovery of indemnity from
the insurer by an employer to whom either willfulness or gross negligence of
his harm-dealing employee became imputable for imposition of liability under
the Oklahoma application of the respondeat
Dayton Hudson Corp. v. American Mut. Ins. Co.,
621 P.2d 1155 (Okla. 1980)
Many states have concluded (in some instances by statute1)
that insuring punitive damages is not
against public policy in many cases2—and
is thus permitted. The typical reasons stated for the allowance of insurance
to pay for punitive damages are that there is little evidence that punitive
damages have the effect of deterring the wrongdoing and that the punishment
would, if insurance is not allowed, be on the general public as the cost of
punitive damages would not be borne by the premium payers but instead by the
society at large in the increased costs of products and services.
It would be pure speculation to conclude that by denying
coverage that accidents on the highways would decrease or that operators of
automobiles would be any more careful in their driving habits.
Lazenby v. Universal Underwriters Ins. Co.,
383 S.W.2d 1 (Tenn. 1964)
Since punitive damages are recoverable in North Carolina in
cases where intentional injury is not involved, there is a compelling reason
that this Court should not create a new public policy prohibiting insurance
coverage for punitive damages. The insurance company in this case would not
contend that doctors would be more reckless or would more frequently commit
gross negligence simply because they are insured under a professional
liability insurance policy that covers punitive damages.
The court of appeals observed that while allowing exemplary
damages coverage shifts the burden of the punishment to "the innocent
members of society who purchase insurance," contrary to the purpose of such
damages, disallowing coverage for a large corporation means that exemplary
damages for the misconduct of perhaps one or only a few employees will
"inevitably be passed on to the consumers of its products—who are also
innocent," also contrary to the damages' purpose.
Fairfield Ins. Co. v. Stephen Martin Paving LP,
246 S.W.3d 653 (Tex. 2008)
Further, some courts have questioned whether the situations in which
punitive damages are awarded can be readily distinguished from situations in
which only compensatory damages are awarded. For example, in cases where
facts are virtually identical, one jury may award only compensatory damages
(to which the insurance applies) while another jury (based on the same
facts) may also award punitive damages, which public policy disallows as
In the McNulty case insurance protection
was disallowed in order that the insured might be punished for his
wrongdoing and to deter him and others from similar conduct. Yet, on
identical facts, another jury might have returned an award limited to
compensatory damages only in which case the wrongdoer would be fully
protected under provisions of a policy such as here. The line of demarcation
between the allowance of punitive damages and compensatory only is too thin
and exacting in my opinion to apply coverage in the one case and deny
coverage in the other. Verdicts of juries are unpredictable.
While many of the cases deciding whether insurance provides coverage for
punitive damages are automobile liability cases, the focus has been on the
insuring agreement. Specifically, do "damages" because of bodily injury or
property damage include only compensatory (or actual) damages? Or do
"damages" because of bodily injury or property damage include all damages?
The insurer contends the policy does not include punitive
damages recovered against the insured because its terms do not expressly
provide for payment of that class of damages. Instead, the provision covers
"damages because of injury" which the insurer claims is confined to payment
for actual damages.
The policy provisions in the case at bar
make no distinction between actual and punitive
damages. Punitive damages are not specifically excluded. Under the
plain language of the policy the company promises to pay on behalf of the
insured all sums which the insured shall
be legally obligated to pay as damages because of injury.… Hence the policy
provision—"for all sums which the insured might become legally obligated to
pay"—is sufficiently broad to include liability
for punitive damages. (Emphasis added)
Similarly, courts have noted that the insuring agreement (or policy)
contains no exclusion for punitive damages:
The plain and ordinary meaning of the language used in the
policy, particularly from the viewpoint of a layman, covers "all damages"
and contains no exclusion for punitive damages.
My conclusion is that if the insurance industry feels that
punitive damages protection should not be afforded under automobile
liability policies, it can very easily make a provision in the exclusions
section to that effect. Until this is done, I am of the opinion that the
insured should receive the coverage sought to be denied in this case.
A CGL insurance policy does not automatically exclude
coverage for punitive damages—although a punitive damages
exclusion may be added by endorsement. Absent such an exclusion, the vast
majority of courts that have ruled on the matter have found that the CGL
does provide coverage for punitive damages awards.
… an insurance company which admittedly took a premium for
[indemnifying against] all liability for
damages, should honor its obligation." … We held, therefore, that an
express exclusion was required to eliminate
coverage for punitive damages from general
liability insurance because the insured was personally at risk if his
liability insurance did not cover those damages. The essence of the
transaction was the insured's purchase of indemnification against all
damages for which he might be held liable. (Emphasis added)
State Farm Mut. Auto Ins. Co. v. Wilson,
782 P.2d 727 (Ariz. 1989)
It is critical to keep in mind, however, that the obligation to pay
punitive damages by a CGL insurer is always
subject to all other terms and conditions of
the CGL policy. For example, if punitive damages are imposed on an
insured for an excluded act—intentional infliction of injury, for
example—the CGL policy either does not provide coverage for that insured
(not an occurrence) or excludes coverage (intended bodily injury). But what
is excluded is not the punitive damages but rather the
intentional wrongdoing of the insured
that resulted in the award of punitive damages.
Today's CGL insurance policies do not contain the phrase "all sums" but
rather "those sums" as respects the damages payable. At least one court has
addressed the lack of "all sums" wording directly, finding coverage and
rejecting the contention that removing "all sums" acted to exclude
While General Accident could have contracted to exclude punitive
damages, it did not do so by the language it chose to use. It argues that
the "uniform net loss" provision used in almost all liability insurance
contracts typically states that the insurance company will pay "all sums"
which the insured shall become legally obligated to pay arising from bodily
injury or property damage, and that, therefore,
General Accident excluded punitive damages by not agreeing to pay "all
sums." As the phrase was so artfully turned in oral argument, we
agree that, "rich and resourceful as is the English language,"
General Accident could have excluded punitive
damages by means other than forgoing use of the words "all sums."
Baker v. Armstrong, 744 P.2d 170 (N.M.
To categorically state that the CGL policy will
never pay punitive damages because
punitive damages are always uninsurable
as a matter of law is clearly erroneous. Texas's highest court provides some
recent (2008) perspective on the insurability of punitive damages throughout
the United States.
Forty-five states have addressed the insurability of punitive or
exemplary damages. Of those, 25 generally do
not prohibit insurability on public policy grounds—but do prohibit in
some instances for UM or UIM coverage. Eight states have a broad prohibition
against insuring punitive damages, and seven states allow coverage for
punitive damages only if imposed vicariously but otherwise prohibit
insurance for punitive damages. The court concluded:
Thus, the majority of states that have considered whether public
policy prohibits insurance coverage of exemplary damages for gross
negligence, either by legislation or under the common law,
have decided that it does not. (Emphasis
Further, the conclusion that the CGL policy wording
always excludes or otherwise does not
provide coverage for punitive damages has little, if any, support. The
oft-cited contention that "damages" include only "actual" damages in a CGL
(or other) policy and do not include punitive damages has not generally been
However, too narrow a focus on whether punitive damages are insurable as
a matter of law and whether the CGL policy includes coverage as "damages"
may result in overlooking an essential point—the CGL policy is always
subject to all terms, limitations, conditions, and exclusions. The character
of the wrongdoing that resulted in award of punitive damages or the nature
of the bodily injury or property damage itself may be excluded from
coverage. Punitive damages awarded against an insured for pollution will
likely be excluded because of the CGL pollution exclusion—not because of the
types of damages that may result.
Justice Gewin addressed the issue of focusing too closely on the type of
damages rather than the conduct that resulted in the award of damages in
The more appropriate basis upon which to hold that public policy
prohibits insurance against liability is the
nature of the conduct of the wrongdoer—not the nature of the damages awarded.
If the defendant acted willfully, intentionally, maliciously or
fraudulently, coverage should be denied; because, in such circumstances, he
should not be able to avoid punishment by shifting the penalty to an
insurance carrier. I doubt that such protection is ever afforded by
insurance, because the companies who are experienced in such matters and who
write the contracts, expressly exclude such conduct from the protection
afforded by the policy. (Emphasis added)
Justice Gewin's comments in McNulty add
some insight into why a state may conclude that punitive damages are not
insurable—to the extent that punitive damages are imposed because of conduct
that is similar to criminal conduct or actions that constitute intentional
wrongdoing or fraudulent or malicious conduct, insurance should not apply as
the element of fortuity is utterly lacking.
Punitive damages imposed for gross negligence present an entirely
different set of circumstances and should be viewed accordingly.
Thus, Justice Gewin's admonition is well reasoned—consider the nature of
the conduct rather than only the types of damages awarded.
1Virginia Code Section
38.20227: "It is not against 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 persons as the result of negligence,
including willful and wanton negligence, but excluding intentional acts."
2"… it is important to note
that punitive damages are recoverable for injuries
other than those intentionally inflicted,"
(emphasis added) Mazza v. Medical Mut. Ins. Co. of
N.C., 319 S.E.2d 217 (N.C. 1984).
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