Navigate the maze of punitive damages insurance options

Offshore punitive wrap policies

In the mid-1980s, Bermuda-based insurers not regulated by state insurance departments in the US began to offer policies to "fill the gap" created by the inconsistent treatment of insurability. These policies became known as off-shore punitive wraps.

An off-shore punitive wrap policy fills the gap when the on-shore "wrapped" liability policy is unable to pay a punitive damage award because punitive damages are uninsurable in a given jurisdiction. The insurance is generally written on an indemnification basis, without any "duty to defend" on the part of the carrier. Payments made under the domestic policy generally erode the per occurrence and aggregate limits of the punitive wrap policy.

Most favored venue clauses in umbrella policies – a growing trend

Recently, most favored venue clauses have become more popular. When applying a most favored venue clause with respect to punitive damage awards, the broadest clauses may provide that the law of the jurisdiction "most favorable" to the insurability of punitive damages will apply, provided the jurisdiction meets certain criteria. Specifically, it must be the jurisdiction where

  • Punitive damages were awarded
  • The act of giving rise to the punitive damages award occurred
  • The insured is incorporated or maintains its principal place of business
  • OR the insurer is incorporated or maintains its principal place of business.

When this provision is included in a policy that affirmatively covers (or does not exclude) punitive damages, it provides assurance that, to the greatest extent possible, such damages will be covered by the insurer by relying on the most favorable laws of any relevant jurisdiction, even if covering punitive damages is contrary to the laws of other potentially relevant jurisdictions.

General speaking most favored venue clauses are issued by admitted carriers and have been filed and approved by the state regulators.1

A checklist for insurance purchasers

Although rare, punitive damage awards are still an important consideration for risk managers and brokers. When investigating available alternatives, insurance purchasers may ask the following questions:

  • Does the coverage offering satisfy the fundamental objective: to ensure the carrier and policyholder have the same mutual interest in a punitive damage claim scenario?
  • How does the punitive damage coverage offering affect the available limits of insurance?
  • Are the terms and conditions addressing punitive damages consistent through the excess casualty tower?
  • What uncovered loss scenarios may be faced? Are there any policy restrictions which could affect the availability of punitive damage coverage?
  • Is coverage written on a "pay on behalf" or "indemnify" basis?
  • Does the decision to purchase coverage carry any increased scrutiny from a reputational risk perspective for the policyholder?
  • What is the total cost associated with purchasing this broadened coverage for the excess casualty tower?
  • Do the coverage triggers in the alternative Most Favored Venue endorsements provide increased coverage assurance via the insurer's state of domicile?

See Punitive Damages Awards in Construction

1Certain state regulators only permit restrictive versions of most favored venue endorsements to ensure that punitive damage coverage does not violate applicable state law or public policy.

Part of this article is excerpted from:

Insurance products underwritten by Westport Insurance Corporation, First Specialty Insurance Corporation, North American Capacity Insurance Company, North American Specialty Insurance Company, North American Elite Insurance Company, Washington International Insurance Company, or Swiss Re International S.E. This document is intended to be distributed to licensed insurance producers only. Nonadmitted insurance products are available only through licensed surplus lines brokers and may not be available in all states.