Insurability of Punitive Damages

Every risk manager wants to ensure that their company is protected from large claims, such as punitive damages, where claim values can be significant and highly variable. These awards can pose a catastrophic threat to the solvency of any corporation, and they've recently become more commonplace and excessive.

As the name suggests, punitive damages are awarded in addition to compensatory damages when "the wrong done was aggravated by circumstances of violence, oppression, malice, fraud, ... on the part of the defendant, and are intended to address the plaintiff's mental anguish or other aggravation, to punish the defendant for its behavior." Black's Law Dictionary 390 (6th Ed. 1991).

The construction industry, in particular, is vulnerable to punitive damage awards. Jobs in this space are complex, with numerous activities going on at any one time. Therefore, it's important that construction risk managers make well-informed decisions about insurance coverage. No one wants to tell the C-suite that a punitive damage claim isn't covered when coverage is available.

Insurability of punitive damages

Numerous law firms, legal scholars and reporting services have drafted guides which examine the availability of insurance coverage for punitive damage awards across states.

When determining if punitive damages are insurable, it's important to distinguish between direct and vicarious punitive damage awards. Punitive damages awarded for a policyholder's own conduct are direct punitive damages. Punitive damages awarded because a policyholder is held responsible for the wrongdoing of another, such as an employee, are vicarious.

As the map below indicates, the insurability of punitive damages is inconsistent across states. However, in recent years, courts have started to allow insurance coverage for punitive damages. For example, between 1982 and 2004, three states amended their positions and permitted the insurability of directly assessed punitive damages. During the same time, 23 states amended their positions to allow insurance coverage for vicariously assessed punitive damages. Yet, at present, roughly half of states either deny or are unclear on punitive damages coverage. This means if there are allegations of punitive damages, a claim can become a liability on a contractor's balance sheet.1


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1Punitive Damages-A State by State guide to Law & Practice. 2009-2010 Edition. Robert W. Hammesfahr and Lori S. Nugent. Thomson Reuters/West.

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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.