Gavel and Scales

Punitive damages: Facts, fictions, and feasibility of obtaining insurance coverage

While punitive damages are available in most types of civil litigation, the focus of this article, particularly when discussing jury awards, is primarily on personal injury litigation.



By Mia Finsness, Managing Executive, Global Casualty Underwriting and Claims

Introduction

In liability insurance focusing on US risks, punitive damage exposures hang heavy over risk assessment. Punitive damages are unpredictable by nature and can be crushingly explosive in value. As a result, businesses naturally seek to mitigate their exposure to punitive damages in civil litigation by procuring insurance, but such insurance may be hard to come by. Unpredictability combined with severity makes punitive damages difficult to underwrite. Nevertheless, in the context of US civil litigation, the law on punitive damages, and the availability of insurance coverage for the same, continues to evolve.

" . . . the law on punitive damages, and the availability of insurance coverage for the same, continues to evolve."

 

This article provides an overview of some of the basic concepts of punitive damages and attempts to demystify some common assumptions. The included tables and appendices contain updated information on punitive damage standards and available tort caps throughout the 50 states. Finally, the article provides an overview of the availability of insurance for punitive damages and various options accessible to clients seeking to maximize their insurance coverage for punitive damages.

While punitive damages are available in most types of civil litigation, the focus of this article, particularly when discussing jury awards, is primarily on personal injury litigation. However, most of the state rules regarding standards and caps for punitive damages apply broadly to all types of civil litigation, and the principles discussed herein can be informative outside the context of personal injury litigation.

As always, the information in this article is current as of the date of this writing. Laws can change on a dime, and readers should confirm that the standards and rules set out herein remain good law in the states they are dealing with.

Punitive damages 101: What are they?

As the name would suggest, punitive damages are used in civil litigation to punish defendant tortfeasors. While compensatory damages are intended to reimburse a civil plaintiff for his or her sustained injuries, punitive damages are intended to punish the defendant for outrageous, willful, or wanton conduct, and to deter the defendant and others from engaging in similar conduct in the future.

Punitive damages can be awarded by juries or judges.1 In some states, punitive damages are decided in a second stage of the trial, after the first stage in which liability is established and compensatory damages are decided. In other states, both compensatory and punitive damages are awarded in the same verdict at the end of a single trial. Either way, generally speaking there can be no punitive damages award absent a compensatory damages award.2 Therefore, punitive damages awards will be overturned by courts in most states if a jury has not also awarded compensatory damages.

Punitive damages are not available in every state. Michigan, Nebraska, Washington, and Puerto Rico do not allow for punitive damage awards. In states called split-recovery, allocation, or apportionment states, some or the entire punitive damages award goes to the state, not the plaintiff. Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon, and Utah all currently have split-recovery statutes in place. Most of these states require that 50%–75% of the punitive damages award be paid to the state. Some of these states require that the money be paid into the state treasury, while others require that the money be designated for specific state-operated funds.

What conduct is required for a punitive damages award?

Each state has an established standard for the tortfeasor conduct required to support a punitive damage award. In some states, a plaintiff must prove that the defendant tortfeasor engaged in intentional conduct. In Maryland, for example, punitive damages may be awarded only if the defendant acted with “intent to injure, fraud, or evil motive.” Other states do not require the conduct to be so egregious. In West Virginia, for example, the standard is “extremely negligent conduct that is likely to result in harm.” Most states fall somewhere in between these two extremes (see Figure 1 for a full listing).

In addition, the standard of proof for proving the conduct described above is typically “clear and convincing evidence,” which is more than the “preponderance of the evidence” standard applicable to compensatory damages, but not as great as proof “beyond a reasonable doubt,” which is the criminal standard.

There may be other nuances depending on what state is at issue. In California, Arizona, and Florida, punitive damages cannot be awarded against public entities. Finally, punitive damages standards are decided by each state’s legislature and are subject to change over time. In January 2020, for example, a Senate bill was introduced in Missouri that would establish new restrictions on punitive damage awards. The bill proposes raising the standard required to prove punitive conduct from acting with “evil motive” or “reckless indifference to human life” to proving that the defendant “intentionally harmed the plaintiff” or acted with a “deliberate and flagrant disregard for the safety of others.” This revision would create a higher standard that would be more difficult for a plaintiff to prove by “clear and convincing evidence” at trial.

How often are punitive damage awards paid out?

One common misconception that deserves demystification is the frequency of punitive damage awards in the US. Perhaps because punitive damage awards make for salacious news headlines, we read about them often and may assume that they are commonplace. The fact is, however, that the actual frequency of such verdicts is quite low compared to the number of personal injury lawsuits filed every year in the US.

". . . the actual frequency of [punitive damages] verdicts is quite low . . ."

 

This low frequency can be attributed to two things. First, the reality is that only a very small percentage of personal injury cases in the US go to trial in the first place. By most approximations, at least 95% of civil cases settle, rather than go to trial.3 The second reason for low frequency of punitive damages is that out of the very few cases that do go to trial and result in plaintiffs’ verdicts, a small percentage of them involve punitive damages.

Settlements do not contain punitive damages
As noted above, the vast majority of cases settle outside of court. Settlements do not typically specify whether the monies paid are for punitive or compensatory damages, with the result of the default assumption is that they are compensatory.

There are several reasons why settlements are not broken into compensatory and punitive damages. First, it would be time-consuming and difficult to quantify the punitive and non-punitive aspects of the settlement. Second, plaintiffs typically do not have an incentive to earmark some of the settlement for punitive damages. In several states, some or all of the punitive damages allocation would go to the state, not the plaintiff. Moreover, in all states plaintiffs are taxed on punitive damages, whereas they are not taxed on compensatory damages for bodily injury or property damage.4 The fact that a plaintiff can immediately take home the entire settlement sum (minus attorneys’ fees) is one reason why plaintiffs are usually incentivized to settle, versus taking a case to trial and typically receiving a lower value than a potential trial verdict.

Equally, defendants are inclined to label settlements compensatory, not punitive, so as not to concede that they engaged in egregious behavior. In addition, and as will be addressed later, punitive damages are not always covered by liability insurance. In personal injury cases with real punitive damage exposure to the defendant, an insurer that does not provide coverage for punitive damages may resist settling a case for a large sum that arguably reflects uncovered punitive damages, along with the compensatory damages, even where the settlement itself does not expressly label the damages.

This situation occurred in 2015 when Walmart’s liability insurers refused to reimburse Walmart for a settlement emanating from a 2014 accident between a Walmart truck and a vehicle with Tracy Morgan as a passenger. While we do not know the amount of the actual settlement, court documents indicated that it was over $90 million.5 Walmart’s insurers argued that the settlement value was inflated and represented Walmart’s punitive damages exposure, which was not covered by the insurance policies.6 The insurers’ argument was that if Walmart had taken the case to trial instead of settling, Walmart, and not the insurers, would have had to pay any punitive damages verdict. The insurers argued that Walmart overpaid the settlement to avoid this outcome and force its insurers to pay for the entire sum. When Walmart sued its insurers, the insurers sought discovery from Morgan to show that his injuries were not serious enough to warrant the “compensatory” settlement paid by Walmart. Unfortunately, for purposes of this article, the case between Walmart and its insurers settled out of court, so we do not know how a court would have ruled in this novel coverage situation.

Few personal injury cases that go to trial result in punitive damage awards
Regarding the small percentage of cases that actually do go to trial, many of these cases do not result in verdicts containing punitive damages. However, it is important to note that the relative infrequency of punitive damage awards does not mean large verdicts do not happen. Rather, we have observed from our own recent experience that juries now take into account punitive activity when determining economic and non-economic compensatory awards like pain and suffering. Colloquially called “compunitive” awards, massive compensatory damage awards can rival traditional punitive damage awards in their value. Moreover, because there is no Supreme Court guidance on the reasonableness of pain and suffering damages like there is for punitive damages, these compensatory damages in particular are very difficult to reduce on appeal.

"Colloquially called ‘compunitive’ awards, massive compensatory damage awards can rival traditional punitive damage awards in their value.”

 

In 2018, for example, a jury in Harris County, Texas, rendered a plaintiff’s verdict in a trucking case for $89,050,000 in compensatory damages and $0 in punitive damages.7 Though the jury did not formally award punitive damages, the pain and suffering figure clearly reflected the jury’s anger and their desire to punish the defendant. After the verdict was rendered, some speculated that the jury purposely circumvented the state’s punitive damages caps.

Similarly in 2019, a Maryland jury awarded $229.6 million in purely compensatory damages to a plaintiff in a medical malpractice case.8 The speculation concerning this case was that the plaintiff did not meet the high legal standard for awarding punitive damages (there must be intentional conduct in Maryland). As a result, the jury may have inflated the compensatory award to make up for its inability to award punitive damages.

Figure 2 shows verdicts and settlements above $5 million publicly reported in Westlaw and Law360 in 2019. Only 30% of the verdicts listed in Table 2 included punitive damage awards. Of the remaining 70%, there were ten verdicts over $50 million that had no punitive damages component and 58 verdicts over $10 million with no punitive damages. As is clear from this limited data, there are many large awards rendered without punitive damages components.

Are there limits to how large a punitive damage award can be?

Punitive damage values are very subjective. In theory, a punitive damages award should be tied to the defendant’s reprehensible conduct, but the reality is that juries or judges can take almost anything into consideration when determining the size of a punitive damages award.

For example, they can consider the defendant’s wealth. While evidence of a defendant’s wealth may induce a jury to award an inflated punitive damage number (if the defendant has the metaphorical “deep pockets”), if the evidence of the defendant’s wealth demonstrates the punitive damages award would bankrupt the defendant, the award may be reduced to avoid such an outcome. Similar to evidence of wealth, evidence of insurance is also admissible to rebut or impeach a defendant’s testimony that it cannot afford to pay the punitive damages award.

Generally, the reasonableness of a punitive damages award is judged according to the following factors as set forth by the United States Supreme Court:

  • The degree of reprehensibility of the defendant’s misconduct;
  • The disparity between the actual harm suffered by the plaintiff and the punitive damages award;
  • The difference between the jury’s punitive damages award and damages awarded in comparable cases; and
  • The defendant’s wealth

Many states have caps on the amount of punitive damages that a jury can award in any given case. Caps are enacted by the legislature, but the courts are in charge of enforcing them. After a jury renders a large verdict, the judge will apply an applicable cap to reduce the size of the award to the cap amount. Sometimes, a court may decide that a punitive damages cap is unconstitutional and will rule that the cap is invalid.

". . . the landscape regarding punitive damages caps is fluid and every-changing.”

 

Legislation on punitive damages caps and appellate court decisions interpreting such legislation are commonly thought to be influenced by the political leanings of the legislators and judges, and may be influenced by organizations that lobby on behalf of plaintiffs’ attorneys or business organizations such as a chamber of commerce. As a result, the landscape regarding punitive damages caps is fluid and ever-changing. If, after an election, a state legislature or judiciary shifts from conservative-leaning to liberal-leaning, there may be downwind impacts on the future of any punitive damage caps in that state. Likewise, if a state elects more conservative legislators and judges, there may be new legislation proposed to introduce new caps on damages.

The following presents an overview of the damage caps in place at the time of this writing.


Currently, 27 states have no legislative caps on punitive damages.

Only one state, Virginia, has an absolute cap of $350k. Georgia has an absolute cap of $250k, but there are exceptions for product liability9 cases, cases involving DUIs, or cases where the defendant’s conduct was intentional.

The following states have punitive damages caps tied to compensatory damage awards:

Florida – The cap is $500k or three times the compensatory damages, whichever is greater.

Exceptions:
  • If the defendant was motivated by financial gain, the cap increases to $2m or four times the compensatory damages.
  • If the defendant acted with intent to harm, there is no punitive damages cap.

Alabama – The cap is $500k or three times the compensatory damages, whichever is greater.

Exceptions:
  • The cap increases to $1.5m if the plaintiff suffered physical injury.
  • The cap is $50k or 10% of the defendant’s net worth, if the defendant is a small business.

Alaska – The cap is $250k or three times the compensatory damages, whichever is greater.

Exception:
  • If the defendant knew the consequences of his or her actions or was motivated by financial gain, the cap increases to $7m, or four times the compensatory amount, whichever is greater.

Colorado – The cap is the amount of compensatory damages awarded.

Idaho – The cap is $250k or three times the compensatory damages, whichever is greater.

Indiana – The cap is $50k or three times the compensatory damages, whichever is greater.

Nevada – The cap is $300k, if the compensatory damages are less than $100k. Otherwise, $100k or three times the compensatory damages, whichever is greater.

New Jersey – The cap is $350k or five times the compensatory damages, whichever is greater.

North Carolina – The cap is $250k or three times the compensatory damages, whichever is greater.

North Dakota – The cap is $250k or two times the compensatory damages, whichever is greater.

Ohio – The cap is two times the compensatory damages.

Exception:
  • If the defendant is a small business or individual, the cap is 10% of defendant’s net worth up to $350k.

Oklahoma – The cap is $100k or the amount of compensatory damages, whichever is greater, when the defendant acted with reckless disregard.

The cap is $500k or two times the compensatory damages in cases when the defendant acted with intentional malice.

South Carolina – The cap is $500k or three times the compensatory damages, whichever is greater.

Tennessee – The cap is $500k or two times the compensatory damages, whichever is greater.

Texas – The cap is $200k or two times the economic damages plus the non-economic damages up to $750k, whichever is greater.

West Virginia – The cap is $500k or four times the compensatory damages, whichever is greater.

Wisconsin – The cap is $200k or two times the compensatory damages, whichever is greater.

The following states tie punitive damages caps to the defendants’ net worth:

Kansas – The cap is $5m or an amount equal to the defendant’s gross annual income, whichever is less.

Montana – The cap is up to 3% of the defendant’s net worth, with an absolute cap of $10m.

Mississippi – The cap is $20m for a defendant with a net worth of more than $1b.

The cap is $15m for a defendant with a net worth of $750m-$1b.

The cap is $5m for a defendant with a net worth of $500m-$750m.

The cap is $3.75m for a defendant with a net worth of $100m-$500m.

The cap is $2.5m for a defendant with a net worth of $50m-$100m.

The cap is 2% of the defendant’s net worth if the defendant’s net worth is less than $50m.

Montana – The cap is up to 3% of the defendant’s net worth, with an absolute cap of $10m.

Connecticut – has its own unique rule: Punitive damages are capped at the cost of litigation, including attorneys’ fees.


Even where there are no caps on punitive damages in a given state, there is Supreme Court guidance on the “reasonableness” of punitive damage awards (see above). Appellate courts routinely use this guidance to reduce the size of excessive punitive damage awards.

When assessing the reasonableness of a punitive damages award, one factor examined by the courts is the “ratio” of punitive damages to compensatory damages. The US Supreme Court suggested that most awards should be a single-digit ratio and that a ratio of 4-to-1 is “close to the line of constitutional impropriety.”10 However, the Court did not develop a bright-line rule, with the result that the state courts have their own jurisprudence that takes into consideration all of the factors set out by the Supreme Court. Many state courts routinely reduce punitive damage awards to a 9-to-1 ratio or lower, but others have affirmed higher ratios, depending on the facts of the case.

Case study:

In the legendary McDonald’s hot coffee case from 1994,11 a 79-year-old woman was awarded $200,000 in compensatory damages and $2.7 million in punitive damages against McDonald’s after she suffered third-degree burns from coffee that spilled on her lap. According to court testimony, McDonald’s knew of approximately 700 similar injuries from its 190-degree coffee, forming the basis for a punitive damages award. The jurors decided on the punitive damage figure of $2.7 million in response to the plaintiff’s lawyer’s suggestion that they penalize McDonald’s for two days’ worth of coffee revenues, which were approximately $1.35 million per day at the time. On appeal, the court reduced the compensatory damages to $160,000 (to take into account contributory negligence) and the punitive damages to $480,000, a 3-to-1 ratio. Despite the reduction in award, McDonald’s nevertheless revised the warnings on its coffee packaging to avoid similar liability in the future.


Case study:

In 2018, a California jury awarded approximately $80 million in damages against Monsanto to a groundskeeper who developed non-Hodgkin’s lymphoma allegedly from using Monsanto’s Roundup® weed killer product for years.12 The jury awarded $75 million in punitive damages, which was 15 times the size of the $5 million compensatory award. The US District judge examined “three guideposts”13 in determining whether the size of the punitive damages award was reasonable, and determined that “Monsanto’s conduct, while reprehensible, [did] not warrant a ratio of that magnitude, particularly in the absence of evidence showing intentional concealment of a known or obvious safety risk.” The judge also cited another Roundup® case, in which the judge concluded that a 1:1 ratio was appropriate. “Guided first and foremost by the nature of Monsanto’s conduct,” the judge in the Hardeman case reduced the punitive damages award to $20 million—a 4:1 ratio to compensatory damages.


As noted above, the ratio is only one factor that the courts take into consideration when determining whether a punitive damage award is reasonable. In addition, a court upholding a large ratio may depend on the size of the award itself. It the punitive damage award is not large, objectively speaking, then the court may uphold, even though the ratio to the compensatory award is larger than generally accepted ratios.

For example, in a California employment case, a warehouse worker sued for lost earnings and mental suffering due to disability bias.14 The jury awarded him $70,000 in compensatory damages and $550,000 in punitive damages. Despite the punitive damages award being more than California’s preferred 4-to-1 ratio, the court upheld the award because it was not excessive, in and of itself.

The Seventh Circuit noted that all the aims of punitive damage awards must be taken into consideration. Also, if the award is reduced to an amount so small that it will not punish or deter the defendant, then it may lose its value.15

Case study:

Another case demonstrating the lack of any bright-line rules on the limits of punitive damages awards is a case from South Carolina stemming from a 2014 accident in a Target parking lot. In that case, a toddler accidently stabbed her mother in the hand with a used syringe she found lying in the parking lot. The mother subsequently suffered emotional distress and an upset stomach while on medication to prevent hepatitis and HIV, and later sued Target. At trial, the jury awarded the mother $4.5 million in punitive damages—45 times the $100,000 compensatory damages award. On appeal, the South Carolina Court of Appeals notably did not enforce the state’s punitive damages cap because Target had neglected to plead the cap as a defense during trial.16 The appellate court also did not address the large ratio of punitive damages to compensatory damages in upholding the $4.5 million punitive damages award. While it is likely that the defendant will appeal further to the South Carolina Supreme Court, the decision by the Court of Appeals to affirm the verdict underscores the unpredictable nature of courts’ decisions relating to punitive damage awards.


Are certain types of defendants more susceptible to punitive damage awards?

Many assume that only large, corporate defendants are at risk for punitive damage awards. While it is true that “deep-pocket” defendants may be assessed large awards if their conduct merits punitive damage awards, not all awards against large corporate defendants include punitive damages and, equally, juries often award punitive damages against smaller defendants in response to perceived egregious behavior. Often, defendants in DUI cases and employers in employers’ liability cases see higher rates of punitive damage awards than most other types of defendants in civil cases. It seems clear that juries will not be afraid to put smaller defendants out of business by awarding punitive damages if doing so will right the perceived injustice that the defendant caused to the plaintiff or society as a whole.

" . . . not all awards against large corporate defendants include punitive damages and, equally, juries often award punitive damages against smaller defendants in response to perceived egregious behavior."

 

Among the verdicts in Figure 2, there are several very large punitive damage awards that were rendered against smaller commercial defendants, including a $50 million punitive damages award against a low-income housing building owner and a $100 million punitive damage award against a Georgia scrap metal recycling company.

Are punitive damages insurable?

Currently, punitive damages are unambiguously uninsurable in 11 states. States falling into this category include California, Florida, and New York. In addition, four states prohibit insurance coverage for punitive damage awards attributable to the direct wrongful conduct of an insured defendant, but allow coverage for punitive damages where the punitive damages are awarded for vicarious liability.17 Finally, the law is unclear in three states and Washington, DC, creating much uncertainty for insured defendants in those states as to whether or not there will be coverage for punitive damages. Out of the 2019 publicly reported verdicts detailed in Figure 2, 54% of the punitive damages awards were rendered in states where they are uninsurable, and one was rendered in a state where the law is unclear.

The theory underlying certain states’ public policy against allowing insurance for punitive damages is that to do so would undermine the rationale of punitive damage awards, which is to punish the defendant. In other words, if a defendant can offload the punitive damages onto its insurer, then the defendant will not feel the punishing effects meant to be conferred by the punitive damages and will not be deterred from future action. It should be noted that the public policy theory does not consider the punishing effect that increased insurance premiums have on insured defendants when punitive damage awards are paid by routinely paid by insurers. Moreover, and as noted above, these days many compensatory awards are punitive in nature, and yet insurance unquestionably covers these. Indeed, one reason why compensatory awards are increasing in size may be a perception by jurors that punitive damage awards will be reduced on appeal or reversed entirely, particularly in states where the standard of proof for awarding punitive damages is strict.

Nevertheless, given the subjective nature of punitive damages as well as their propensity to inflict real and lasting financial damage on a defendant, it is natural for businesses of all sizes to desire reliable insurance protection for both compensatory and punitive damages. The following section outlines the various options available to clients who are looking to obtain coverage for punitive damages awards.

Option 1: Affirmative punitive damages coverage in a commercial general liability (CGL) policy
The simplest way to buy insurance for punitive damages is to request a clause or endorsement in the CGL policy that affirmatively states that punitive damages are covered by the policy.18 Such a clause may incur additional premium, but including it will ensure that the policy is unambiguous in its intent to cover punitive damages. There are, however, risks to opting for this seemingly straightforward option. Most important, depending on which law applies to the policy, a court may choose not to enforce the provision regarding insurance for punitive damages because of the public policy considerations delineated above. If a court construing an insurance policy determines that California law applies to that policy, for example, it will necessarily invalidate the punitive damages provision in the policy. The insured will not have coverage for any claims involving punitive damages, despite believing that it had purchased such coverage. The result is that even if the policy provides affirmative coverage for punitive damages, an insured cannot be certain in advance that an actual punitive damages award will be covered by that policy at the end of the day.

Option 2: Most favored nations wording in a CGL policy
This option essentially steers a court to a choice of law that maximizes the potential for punitive damages coverage under the policy. In essence, a “most favored nations” (MFN) clause stipulates that the law applicable to the insurability of punitive damages under the policy will be the law which, out of a choice of several enumerated options, allows for coverage of punitive damages. The several governing law options listed are typically:

  1. State of insured’s incorporation or business;
  2. State where the policy was issued;
  3. State of the conduct giving rise to punitive damages; or
  4. State of the lawsuit where punitive damages where awarded.

The MFN clause directs the court to choose from the itemized options a choice of law that will allow for recovery of punitive damages under the policy. For example, a given case may have the following facts in relation to the questions posed above:

  1. The insured is incorporated and does business in California;
  2. The policy was issued in New Jersey;
  3. The conduct giving rise to punitive damages happened in California; and
  4. The lawsuit is venued in Alabama.

In this scenario, a court determining whether a punitive damages award is covered by a policy containing a MFN clause would apply Alabama law, since that is the only law out of the four options in the MFN provision that allows for insurance coverage of punitive damages.

It is important to note that the options listed out in an MFN clause are options that could otherwise be accepted as governing laws in standard judicial choice-of-law analyses. In other words, the choice-of-law for an insurance policy issued in the US must have some relationship to the parties to the contract or to the underlying case involving punitive damages. A MFN clause cannot be drafted to contain an option completely unrelated to anyone in the contract or case because a US court will not enforce it.

While MFN clauses provide some protection to an insured seeking punitive damages coverage, they only do so if one of the various choice-of-law options allows for coverage of punitive damages. If all options end up being states wherein insurance coverage for punitive damages is barred, then the court will have no choice but to preclude coverage for punitive damages under the policy. In addition, even when a state allows for punitive damage coverage, the court hearing the case and deciding the issue may determine it is against public policy for that court to apply the law of another state if doing so would contravene the public policy of the court deciding the issue. So while an MFN clause is better than nothing to ensure coverage for punitive damages, uncertainties remain and there is no guarantee that a punitive damages award rendered against the insured will be covered under such wording.

Option 3: Punitive damages wrap policy
A third option for procuring insurance coverage for punitive damages is buying a punitive wrap (puni-wrap) policy. Like the name suggests, puni-wrap policies “wrap” around traditional CGL policies to provide insurance coverage for punitive damages in cases where it is against public policy for the CGL policy to cover those damages. A puni-wrap policy is typically issued by an alien Bermudian insurer affiliate of the domestic insurer that issued the CGL policy. Indeed, an insured who purchases a CGL policy in the US may also be able to procure a puni-wrap policy, if the domestic CGL carrier has a Bermuda office and issues such policies. Markel is one of only a handful of insurance carriers offering this policy.

" . . . Puni-wrap policies “wrap” around traditional CGL policies to provide coverage for punitive damages..."

 

The concept of a puni-wrap policy is straightforward. It is a policy that only covers punitive damages. Nevertheless, the nuances regarding how these policies operate are unique and warrant further explanation.

As noted above, an insured buys a puni-wrap policy in conjunction with a US CGL policy (referred to in the puni-wrap as the “controlling policy”). The controlling policy is issued by a US affiliate of the same insurance company issuing the puni-wrap policy out of Bermuda. For example, an underwriter at Markel in the US will issue the controlling CGL policy and an underwriter at Markel in Bermuda will issue the accompanying puni-wrap policy.

Coverage under the puni-wrap policy is triggered when punitive damages are sought on a claim in a state where punitive damages are uninsurable as a matter of public policy. In such a situation, the controlling policy covers the compensatory damages and the puni-wrap policy covers the punitive damages. However, there is a single shared limit between the two policies for any given claim. If the claim occurs in a state where punitive damages are insurable as a matter of public policy, then the controlling policy responds to cover the entire claim, and the puni-wrap policy is not triggered.

All terms and conditions of the puni-wrap policy are determined or “controlled” by the controlling policy, except with regard to coverage provisions concerning punitive damages, choice of law, or dispute resolution. As a result, if the controlling policy does not cover a claim for reasons other than because punitive damages are not covered, then there will likewise be no coverage under the puni-wrap policy. An easy example would be an asbestos claim noticed to both the controlling policy and puni-wrap policy. The asbestos exclusion in the controlling policy would preclude coverage under both policies, regardless of whether there are punitive damages.

As noted above, basic terms and conditions not shared between the two policies are:

  • Coverage for punitive damages: A puni-wrap policy covers punitive damages even if the controlling policy does not.
  • Choice of law: Puni-wrap policies are typically subject to Bermuda or English law, which allow for insurance coverage of punitive damages.
  • Dispute resolution provision: Puni-wrap policies typically contain Bermuda or UK arbitration provisions, which guarantee that coverage determinations will not be subject to the adjudication before US judges seeking to enforce state public policy agendas.

The controlling and puni-wrap policies not only share the same terms and conditions, but they also share a single limit of liability for any given claim. For example, if the controlling policy has a $10 million per occurrence limit, the puni-wrap policy will also have a $10 million per occurrence limit. In the event that the controlling policy limit is eroded to pay covered compensatory damages, the eroded sum will also reduce the limit of the puni-wrap policy with the result that there will be less than a full limit available from the puni-wrap to indemnify a punitive damages award.

While the controlling policy erodes the puni-wrap, the puni-wrap does not, in practice, erode the controlling policy. In practice, this only makes a difference in a situation where there is more than one claim on a given policy year that implicates both policies. Since compensatory damages are always incurred first, and compensatory payments erode both the controlling and puni-wrap policies, the most that can be paid out on any single given claim is a single combined limit of $10 million (using the example above). However, if there is a claim in which the controlling policy is only partially eroded by compensatory damages and the remainder of the shared limit is eroded by the puni-wrap policy, money will remain on the controlling policy limit for the next claim that comes in the door. By contrast, there will be no money remaining on the puni-wrap policy since it will have been completely eroded by the shared limit of the first claim.

From a practical perspective, puni-wrap policies are infrequently triggered because the vast majority of personal injury claims in the US settle and do not go to trial. As discussed earlier in this article, settlements are considered compensatory damages that are paid for by controlling policies, no matter which jurisdiction they are in. Insurers in puni-wrap situations do not argue among themselves as to how to classify the damages and from which policy they will be paid, because the controlling policy and puni-wrap policy are both issued by subsidiaries of the same insurance company.

In sum, a puni-wrap policy is a great option for an insured seeking affirmative punitive damage coverage, because the coverage will not be invalidated by a US court on public policy grounds. The downside to procuring a puni-wrap policy is that the insured may need to buy two policies in order to procure the comprehensive coverage, and will also need to pay an additional, albeit much smaller, premium for the puni-wrap policy. These policies are suitable for middle-market and large commercial insureds procuring primary and excess insurance from US insurers.

". . . a puni-wrap policy is a great option for an insured seeking affirmative punitive damage coverage, because the coverage will not be invalidated by a US court on public policy grounds."

 

For insurers, the risk posed by issuing additional limits is mitigated by the shared limit feature of puni-wraps. However, there is still the possibility of additional exposure beyond the shared limit in a multi-claim scenario. Another downside for insurers is the administrative hassle of having two claims adjusters—one in the US and one in Bermuda–handling the same claim under two different policies.

For a company like Markel, where all claims adjusters report into the same claims division, underwriters and clients can be assured that the adjusters will work collaboratively to resolve these types of claims on behalf of our insureds, whether through settlement or trial.

Option 4: A stand-alone Bermuda Form policy
The final option for procuring punitive damages cover is a stand-alone occurrences-reported policy (also known as a “Bermuda Form” policy) procured from a Bermuda, insurance carrier. Fortune 1000 companies with robust risk management departments typically purchase these policies.

"Bermuda Form policies specifically define covered ‘Damages’ to include punitive damages."

 

Not subject to the jurisdiction of US courts, Bermuda Form policies specifically define covered “Damages” to include punitive damages. Therefore, there are never any claims disputes about whether certain damages are covered or not simply because they are punitive damages. With the exception of fines and penalties, the Bermuda Form policy covers all types of damages, both compensatory and punitive in nature. Moreover, because these policies are subject to arbitration in the UK, Bermuda, or Canada, there is no concern that the punitive damage coverage purchased by an insured will be invalidated on public policy grounds. Affirmative punitive damages coverage is one of the primary reasons why large insureds procure towers of insurance built with Bermuda Form policies issued by different Bermudian insurers.

Conclusion

It is clear that the topic of punitive damages is a meaty one, and this article only brushes the surface. In the current US tort litigation environment where large verdicts due to social inflation are prevalent, insureds are rightly concerned about their possible exposure to punitive damage awards and will be searching for ways to mitigate this exposure. Exploring one of the insurance options detailed above is a prudent step in the right direction towards protecting a company’s assets that may otherwise be threatened by punitive damage claims.

1 Judges can award punitive damages in bench trials. 2 Alaska does not require compensatory damages. Iowa requires the plaintiff to demonstrate “actual” injury in order to recover punitive damages, but does not require that the plaintiff recover compensatory damages for that actual injury. Ryan v. Arneson, 422 N.W.2d 491 (Iowa 1988). In a couple of states like Kentucky, “nominal” compensatory damages are sufficient to support a punitive damages award. See e.g., Fowler v. Mantooth, 683 S.W.2d 250 (Ky. 1984). 3 See repository.law.umich.edu/cgi/viewcontent.cgi?article=2614&context=articles; nytimes.com/2008/08/08/business/08law.html. Most plaintiffs firms’ web sites also cite the 95% number in terms of settlements. 4 Punitive damages and interest are always taxable, making trials somewhat of a deterrent. If a plaintiff is injured and receives $50,000 in compensatory damages and $5 million in punitive damages at trial, the plaintiff will be taxed on the $5 million in punitive damages. Furthermore, plaintiffs’ attorneys’ fees and costs—which can be up to 50% of the final payout—are calculated on the pre-tax award. The Tax Cuts and Jobs Act of 2018 changed the law on tax deductions for legal fees incurred with the result that a plaintiff can no longer deduct their legal fees from their taxes. Forbes estimated that on a $289 million award granted to a plaintiff in a California product liability case, the plaintiff would only receive $20 million of the $280 million award after taxes and attorneys’ fees, and there would be no offset in his taxes for the amount he paid in attorneys’ fees (forbes.com/sites/robertwood/2018/08/13/how-irs-taxes-kill-plaintiffs-289m-monsanto-weedkiller-verdict/#55d58230402e). Forbes similarly reported that on an $80 million verdict, plaintiff’s take home sum could be as low as $2,500,000 (forbes.com/sites/robertwood/2019/03/28/80m-roundup-verdict-is-only-2-5m-after-taxes-new-irs-math/#2f2303915a04). 5 Ohio Casualty Insurance Co. et al. v. Wal-Mart Stores Inc. et al., case number 3:15-cv-07414, in the US District Court for the District of New Jersey (2017). 6 New Jersey law applied to the policies at issue. Under New Jersey law, it is against public policy to insure punitive damages.7 Blake et al. v. Ali et al., case number 2015-36666, in the 127th District Court of Harris County, Texas (2018).8 Zubida Byrom et al. v. Johns Hopkins Bayview Medical Center Inc., case number 24-C-18-002909, in the Circuit Court for Baltimore City, State of Maryland (2019).9 In a product liability situation where there is no cap on punitive damages, a plaintiff who is able to recover such damages in such a case must give 75% of the award to the state, minus a proportionate part of litigation costs and reasonable attorneys’ fees. O.C.G.A. § 51-12-5.1 (e)(2).The following presents an overview of the damage caps in place at the time of this writing. 10 State Farm Mutual Automobile Insurance vs. Campbell 538 US 408 (2003). 11 Liebeck v. McDonald’s Restaurants, P.T.S., Inc., No. D-202 CV-93-02419, 1995 WL 360309 (Bernalillo County, N.M. Dist. Ct. August 18, 1994). 12 Hardeman v. Monsanto Co. et al., case number 3:16-cv-00525, U.S. District Court for the Northern District of California.13 (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. 14 Abarca v. Citizens of Humanity LLC, Calif. Ct. App., No. B283154 (July 31, 2019). 15 Saccameno v. U.S. Bank National Association, No. 19-1569 (7th Cir. 2019). 16 Garrison v. Target Corporation, Appellate Case No. 2017-000267, South Carolina Court of Appeals (January 15, 2020). 17 An example of vicariously assessed punitive damages is where a jury renders punitive damages against a truck driver who is the employee of an insured trucking company, and the company is held liable for those damages due the employer-employee relationship giving rise to vicarious liability. 18 Such a clause is required to get punitive damages coverage in states like Hawaii.