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Choosing the best state for punitive damage awards.

Most liability insurance policies recite coverage for all incurred damages while not specifically excluding punitive damage coverage, leaving parties to rely on a state's particular public policy to determine whether insurance coverage for punitive damages is permitted.

Two states where public policy allows insurance coverage for punitive damages are Delaware and Georgia. Other states such as New York and Ohio hold that punitive damages are uninsurable. Still other courts such as those in Illinois and Kansas distinguish between punitive damage awards for direct liability and vicarious liability, which arises from the principal's responsibility for the acts of an agent. These courts may allow coverage in the first case, but not in the latter.

Differing public policies toward punitive damage coverage is a problem for insureds transacting business and selling products in several states. Which state law will govern the availability of coverage for punitive damage awards? It is not always the law of the state where the insured is sued. Indeed, it may turn out to be the law of any one of several states.

The fact that an insured has a punitive damage award rendered against it in a state that permits insurance coverage for punitive damages does not guarantee coverage. For example, coverage may be hampered if the insurer files a declaratory judgment action against the insured in another state where public policy precludes insuring punitive damages. On the other hand, if the punitive damage award is sustained in a state which does not permit coverage for punitive damage awards, the insured may seek coverage determination in a state where its particular public policy permits such coverage.

Controlling the outcome

For companies operating in several states, two factors may affect the outcome of litigation over the availability of insurance for punitive damages. One factor-the forum that will decide the issue-is controllable by the parties to the disupte, while the other -the determination of choice of law rules-typically is not.

The determination of the appropriate choice of law provision may be within control of the parties or at least negotiable when the policy is purchased. However, once the policy is issued, it is not negotiable. An insured might bargain for a rider providing that the law of a particular state, which permitted insurance coverage for punitive damages, would govern coverage issues. if sufficient contacts existed between the insured or the insurer and the designated state, such a choice of law provision might be permitted to control punitive damage determinations. Choice of law rules concerning insurance coverage questions vary significantly from state to state. States may follow the law of the state that the parties understood to be the principal location of the insured risk during the term of the policy. Conversely, they may follow the law of the state with the most significant relationship to the transaction and the parties. Some states may opt for the state where the insured's principal place of business is located and where a policy was required to be countersigned to be effective. Lastly, they may follow the law of the state where the suit was brought and where damages occurred.

While the parties cannot directly control the choice of law rules that will apply in a particular case, they can control which court in which state will decide the issue. Indeed, the choice of a particular forum can sometimes predetermine the outcome because courts often strive to follow the public policy of their own state rather than traditional choice of law rules. Thus, the practical choice of forum factor may be more important than the theoretical choice of law considerations.

The court determining whether insurance covers punitive damages is usually the first court in which either the insurer or the insured brings suit. There are many places where such a suit can be brought, including the state where the accident occurred or where the insured is incorporated or has its principal place of business. It can also be filed in the state where the insurance policy was delivered or where the insurer is incorporated or has its principal place of business.

The choice of court may be critical to the outcome. Insureds should avoid litigating the coverage issue in a state where public policy precludes punitive damage coverage. Insurers should seek the reverse. Regardless of the choice of law considerations that may dictate that the forum state should apply the law of another state, either the insurer or insured will be handicapped in litigation if the suit is tried in a state where public policy runs against that party's interest.

Court opinions do not always disclose that one state is chosen over another by using the criteria of whether punitive damages are insurable. Courts try, however, to find a choice of law provision that will allow them to reach conclusions that are dictated by their own public policy. Courts may also simply decline to follow laws of another state on the grounds that they run contrary to the public policy of the forum state.

Race to the Courthouse

Insurers are generally more attuned to the practical realities of the choice of forum factor than insureds. Insurers, therefore, are often the first to file suit seeking a declaration of punitive damage coverage issues in a favorable forum. Insureds recently lost two actions brought by insurers seeking to declare that punitive damages were not insurable. In both cases the insurer filed suit in a state that applied its public policy, which not surprisingly held that the damages were not insurable.

In St. Paul Surplus Lines Insurance Co. v. International Playtex Inc., the insurer sued the insured in Kansas where the tort claim resulted in a punitive damage award. The insured attempted to file a subsequent suit in the state of its incorporation, Delaware, which allowed coverage of punitive damages. However, the insurer filed the Kansas action first and that court adjudicated the issue. Based on its policy, the Kansas court held that punitive damages were not insurable.

In Home Insurance Co. v. American Home Products Corp., the insurer also first filed to have the issue of punitive damages determined. It chose, however, not to file suit in Illinois, where the underlying tort and resulting lawsuit occurred, but instead sued in New York which was the principal place of business of the insurer and insured. New York, like Kansas, has a policy prohibiting insurance of punitive damage awards. The Kansas court found that Kansas had the most significant contacts with the case because of product advertisement, sale, use and resulting injury. It therefore required the application of Kansas law regardless of the location of the insured. The New York court, however, found the location of the insured's principal offices to be the controlling factor and applied New York law to preclude coverage for punitive damages.

Different Results? Both the New York and Kansas courts articulated reasons for their choice of law that governed the punitive damage determination.

Yet an important question remains. If the insured had filed first in a state that had contacts with the insured, the policy or the insurer, and where the law did not prohibit insurance of punitive damages as a matter of public policy, would the result have been different?

Although the law of the state in which the coverage suit is filed may not determine the entire issue, that state is more likely to favorably view the question of whether or not punitive damages are insurable, especially if it does not have a public policy prohibiting punitive damage coverage. Thus, if faced with a punitive damage verdict or claim, both insureds and insurers should immediately initiate a coverage action in the state of their choice. It beats giving the other party a head start in filing in a state whose policy may predetermine the outcome of the case.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Humphreys, William C., Jr.; Thorpe, R. Wayne
Publication:Risk Management
Date:Jan 1, 1991
Words:1298
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