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New York holds punitive damages uninsurable.


New York's highest court, the Court of Appeals, ruled punitive damages granted because of a defendant's intentional or grossly negligent behavior are not insurable as a matter of public policy.

The case involved a drug manufacturer, Wyeth Laboratories (a subsidiary of American Home Products Corp.) and its excess liability insurer, Home Insurance Co. The damages were awarded to a two-year-old boy who suffered severe mental impairment as a result of the administration of a drug, aminophylline, manufactured by Wyeth.

Based on a finding that the defendants knew of the risks inherent in the administration of the drug yet failed to warn consumers, the jury awarded the plaintiff $13 million in punitive damages. The defendant's insurer then sued its insured (American Home Products and Wyeth), seeking a court declaration that punitive damages are not an insurable risk.

In analyzing this case, the New York Court of Appeals reasoned that allowing an insurer to pay an insured's punitive damage award defeats the purpose of punitive damages. The deterrent effect to others from engaging in similar conduct and the punishment to the wrongdoer for his conduct would be nullified if punitive awards can be insured. The court, therefore, passed judgment in favor of Home Insurance Co.

This case affects accountants on two fronts. Auditors with clients as defendants in outstanding litigation should be careful to ascertain the potential uninsured exposure to the client should a large punitive award be imposed. With the proliferation of multimillion-dollar damage awards and court rulings similar to this one in several states, the prospect of a large uninsured liability against a client is a growing possibility.

Similarly, accounting firms should review their own insurance policies and state law to determine the consequence of a large malpractice award with a punitive damage component against a CPA firm.

Although an accounting firm's malpractice insurance may cover punitive damage awards, state law may negate coverage for such awards against a firm. (The Home Insurance Co. v. American Home Products Corp., USCCA.2, no. 258, January 18, 1990)

Wayne J. Baliga, CPA, JD., vice-president, AON Corp.
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Jun 1, 1990
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