Author: Matthew Eisele, J. Stevenson Weimer
Date: July 1, 2001
MARINE INSURANCE AND GENERAL AVERAGE
J. STEVENSON WEIMER
COVERAGE OF LIABILITY
FOR PUNITIVE DAMAGES
I. THE INSURING AGREEMENT
The insuring agreement in the marine Protection and Indemnity Form SP-23
provides that the assured will be indemnified against "all such loss and/or damage and/or
expense" which the assured shall "become liable to pay and shall pay on account of the
liabilities, risks, events and/or happenings" covered. Absent an express exclusion, the only
provision which arguably could affect the coverage of punitive damages is that certain "fines
and penalties" will not be indemnified if they result from the failure of the insured to exercise
due diligence to prevent such "violations." Though this language perhaps indicates an
intention to exclude indemnification of punitive damages, it is not likely to be dispositive
under existing law.
II. CHOICE OF LAW: THE INITIAL QUESTION
State law may be referred to when there is no rule recognized by the general
maritime law on the issue, and the matter does not require national uniformity. Wilburn Boat
Co. v. Fireman's Fund Ins. Co., 348 U.S. 310,316 (1955); Commodities Reserve Co. v. St.
Paul Fire& Marine Ins. Co., 879 F.2d 640 (9th Cir. 1989). Admiralty law provides the
choice of law principles governing the determination of which state's law will be applied.
Ahmed v. American Mut. S.S. Owners Protection & Indem. Ass'n, 444 F. Supp. 569, 571
(N.D. Cal. 1978); Navegacion Goya SA. v. Mutual Boiler & Mach. Ins. Co., 1972 A.M.C.
650, 653 (S.D.N.Y. 1972). Admiralty courts apply the "greatest interest" rule in deciding
which state's or nation's law might be applicable. Coats v. Penrod Drilling Corp., 5 F.3d 877
(5th Cir. 1993); Commodities Reserve Co. v. St. Paul Fire and Marine Ins. Co., 879 F.2d 640
(9th Cir. 1989); Eagle Leasing Corp. v. Hadfield Fire Ins. Co., 540 F.2d 1257, 1261 (5th Cir.
1976) (applying law of state where policy issued and delivered); Irwin v. Eagle Star Ins. Co.,
455 F.2d 827, 830 (5th Cir.) (substantial contacts with Florida), cert. denied, 409 U.S. 852
(1972); Liman v. American S.S. Owners Mut. Protection & Indem. Ass'n, 299 F. Supp.
106,108 (S.D.N.Y.), aff'd 417 F.2d 627 (2d Cir. 1969), cert. denied, 397 U.S. 936 (1970).
See also RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 188 (1969). See
generally D. GILMORE & C. BLACK, THE LAW OF ADMIRALTY 69 (2d ed. 1975).
A small body of case law has held that P&I coverage would not be afforded
where punitive damages were awarded, based upon an absence of such specifically
enumerated coverage in the policy. Dubois v. Arkansas Valley Dredging Co., 651 F. Supp.
299 (W.D. La. 1987); Smith v. FrontLawn Enterprises, Inc., 1987 AMC 1130 (E.D. La.
1986). In Smith the court also noted that the "fines and penalties" provision of the P&I policy
"covers situations where there has been a violation of a law and is therefore inapplicable to
. . . punitive damage claims based on unseaworthiness and failure to pay maintenance and
cure." 1987 AMC at 1131.
The Dubois court went further, declaring that even if a policy provided for
coverage in express terms, such a provision would be unenforceable as against public policy.
Dubois, 651 F. Supp. at 302. But see Daughdrill v. Ocean Drilling & Exploration Co., 665
F. Supp. 477, 481 (E.D. La. 1987) (court stated in dicta that because the inherent nature of
a P&I policy is to spread the risk of liability among those similarly situated, coverage for
punitive damages may foster the underlying public policy goals of such damages). However,
the determinative impact of choice of law limits the significance of Dubois and Smith. See
Taylor v. Lloyd's Underwriters of London, 972 F.2d 666, 669 (5th Cir. 1992) (interpreting
the issue of whether punitive damages are covered by a CGL policy the Court held that
Dubois and Smith have not established a specific and controlling federal rule disallowing the
recovery of punitive damages from an insurance company) and Randall v. Chevron U.S-4.,
Inc., 13 F.3d 888, 910 (5th Cir.) as modified, 22 F.3d 568 (5th Cir. 1994), overruled on other
grounds, 164 F.3d 901 (5th Cir. 1999), (applying Louisiana law in the absence of a
controlling federal rule, punitive damages and the cost of defending a punitive damage claim
are covered under a P&I policy). Because of Wilburn Boat and choice of law principles,
public policy and the interpretation of policy language remain the dispositive factors in
deciding whether coverage exists.
III. INTERPRETATION OF POLICY LANGUAGE
At the outset, a determination must be made whether the policy language is
broad enough to encompass punitive damages. Courts have divided on this issue with regard
to standard liability provisions. Generally, courts have seized upon language insuring "all
sums" or "any losses" when coverage has been granted. See, Ridgway v. Guy"Life ]ns. Co.,
578 F.2d 1O26, 1029 (5th Cir. 1978) (applying Texas law); General Cas. Co. v. Woodby, 238
F.2d 452, 457-58 (6th Cir. 1956) (applying Tennessee law); Ohio Cas. Ins. Co. v. Weyare
Fin. Co., 75 F.2d 58, 59 (8th Cir. 1934) (applying Missouri law), cert. denied, 295 U.S. 734
(1934); Greenwood Cemetery, Inc. v. Travelers Indem. Co., 232 S.E.2d 910 (Ga. 1977);
Abbie Uriguen Oldsmobile Buick, Inc. v. United States Fidelity Ins. Co., 511 P.2d 783, 789
(Idaho 1973); Norfolk & W. Ry. Co. v. Hartford Accident & Indem. Co., 420F. Supp. 92, 95
(N.D. Ind. 1976) (applying Indiana law); Skyline Harvestore Systems, Inc. v. Centennial Ins.
Co., 331 N.W.2d 106,107 (Iowa 1983); Continental Ins. Co. v. Hancock, 507 S.W.2d
146,152 (Ky. 1974); Harrel. Travelers Indem. Co., 567 P.2d 1013,1014-15 (Or. 1977); State
v. Glen Falls Ins. Co., 404 A.2d 10 1, 105 (Vt. 1979); Cieslewicz v. Mutual Serv. Cas. Ins.
Co., 267 N.W.2d 595, 597-98 (Wis. 1978).
However, a minority of courts have looked to the scope of the covered risk to
decide whether punitive damages are recoverable by the insured. Thus, language following
the terms "caused by" or "arising out of" has been used to limit policy coverage to purely
compensatory damages. Punitive damages are deemed by these courts to be a result of the
insured's conduct, not the damages sustained by the injured person. Gleason v. Fryer, 491
P.2d 85 (Colo. Ct. App. 1971); Brown v. Western Cas. & Sur. Co., 484 P-2d 1252 (Colo. Ct.
App. 197 1); Casperson v. Webber, 213 N.W.2d 327, 331 (Minn. 1973). The rationale for
this position is grounded on the notion that punitive awards are not granted to compensate
the plaintiff; rather, such awards are intended to punish the defendant. Consequently,
punitive damages are held to fall outside of the category of damages for bodily injury or
Other courts have looked to the intentions or reasonable expectations of the
insured in order to extend or deny coverage. Lazenby v. Universal Underwriters Ins. Co., 383
S.W.2d 1, 5 (Tenn. 1964). Such cases often involve an ambiguity as to the scope of coverage.
Harrel v. Travelers Indem. Co., 567 P.2d 1013,1015 (Or. 1977); Cieslewiczv. MutualServ.
Cas. Ins. Co., 267N.W.2d 595, 598 (Wis. 1978). In any event, it is clear that reasonable
expectations would not include coverage for damages resulting from intentional misconduct.
7 J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4312 at 132-33 (1962). Cf
Hensley v. Erie Ins. Co., 283 S.E.2d 227 (W. Va. 1981) (coverage implied for gross, wanton
or reckless conduct).
When litigation involves an ambiguous policy, courts have applied a rule of
interpretation that such ambiguities are construed in favor of the insured. W. VANCE
HANDBOOK OF THE LAW OF INSURANCE § 136 (3rd ed. 195 1) (discussing doctrine
of contra proferentum). See Abbie Uriguen Oldsmobile Buick, Inc. v. United States Fire Ins.
Co., 511 P.2d 783, 7 8 9 (Idaho 1973); Mazza V. Medical Mut. Ins. Co., 319 S.E.2d 217
(N.C. 1984); Carroway v. Johnson, 139 S.E.2d 908 (S.C. 1965). For example, an ambiguity
may arise from the rule that unless actual damages are sustained, punitive damages may not
be awarded. Therefore, punitive damages "arise out of" or are "caused by" bodily injury or
property damage. This interpretation of course gives "bodily injury" and property damage"
a double meaning within the policy. Cieslewicz v. Mutual Serv. Cas. Ins. Co., 267 N.W.2d
595 (Wis. 1978). Traditionally, admiralty cases have applied state insurance law principles
of contra proferentum in construing maritime policies. See Thomas R. Beer, Comment,
Established Federal Admiralty Rules In Marine Insurance Contracts and the Wilburn Boat
Case, 1 U.S.F. MAR. L. J. 149 (19 89). See also Morrow Crane Co. v. Affiliated FM Ins. Co.,
6 8 6 F. Supp. 265, 267-68 (D. Or. 1987), aff d, 885 F.2d 612 (9th Cir. 1989); Ingersoll Mill,
Mach. Co. v. M/V BODENA, 619F. Supp.493,505 (S.D.N.Y. 1985) (applying New York law)
modified, 829F.2d 293 (2d Cir. 1986).
Nevertheless, not al1jurisdictions will automatically apply the doctrine of
contra proferentum when policy provisions are susceptible to different constructions. See
Baltimore Bank & Trust Co. v. United States Fidelity & Guar. Co., 43 6 F.2d 743, 746 (8th
Cir. 1971) (applying Missouri law). When commercial insurance contracts are involved,
courts will consider a construction that "is most reasonable from a business point of view.
" 9 ARNOULD, MARINE INSURANCE § 105 at 88 (1961 ed.). See also Avondale Indus.,
Inc. v. Travelers Indem. Co., 8 87 F.2d 1200, 1207 (2d Cir. 1989), cert. denied, 496 U.S. 906
IV. PUBLIC POLICY
Once coverage has been established, a second inquiry is necessary to determine
whether such an application is void under state law. Some courts have denied insurance
coverage of punitive damages on the grounds that such coverage contravenes the public
policy of the jurisdiction. Dubois v. Arkansas Valley Dredging, Inc., 651 F. Supp. 299 (W.D.
La. 1987). See GHIARDI & KiSCHER, PUNITIVE DAMAGES LAW & PRACTICE, §
6.11 (1984). Cf SHAUMAIER & MCKINSEY, THE INSURABILITY OF PUNITIVE
DAMAGES, 72 A.B.A.J. 68 (1986). To allow coverage is thought to frustrate the public's
interest in punishing or deterring extreme misconduct. Hartford Accident & Indem. Co. v.
Hempstead, 397 N.E.2d 737, 743 (N.Y. 1979); Padavan v. Clemente, 350 N.Y.S.2d 694, 696
(N.Y. App. Div. 1973). However, this view is not universally accepted. Courts have
generally divided along the following categories:
(1) Coverage denied as a matter of public policy;
(2) Coverage denied, except for the vicarious liability of the insured;
(3) Coverage not barred by public policy; and
(4) Coverage allowed, except for intentional misconduct.
1. Coverage Denied as a Matter of Public Poligy.
Some jurisdictions flatly hold that public policy forbids the coverage of punitive
damages. Variety Farms, Inc. v. New Jersey Mfrs. Ins. Co., 410 A.2d 696 (N.J. 1980). In
these jurisdictions it is unnecessary to apply contractual interpretation principles to reach a
conclusion as to coverage. Such coverage is void as a matter of law. Moreover, the
prohibition of insuring against punitive damages is applicable whether the insured's liability
results from his own acts or those of his servant. Hartford Accident & Indent. Co. v.
Hempstead, 397 N.E.2d 737 (N.Y. 1979). Several other decisions have followed this
approach. See e.g.,; City Prod. Corp. v. Globe Indent. Co., 151 Cal. Rptr. 494 (Cal. 1979);
Newark v. Hartford Accident & Indent. Co., 342 A.2d 513 (N.J. 1975); American Ins. Co.
v. Saulnier, 242 F. Supp. 257, 261 (D. Conn. 1965).
Courts taking this view contend that allowing tortfeasors to shift the burden of
punitive damages to the insurer would defeat the purpose of such awards: deterrence. If
entities are permitted to insure against punitive damages, these courts reason, then the
deterrence effect of such damages would be nullified. Dubois v. Arkansas Valley Dredging
Co., Inc., 651 F. Supp. 299, 302-03 (N.D. La. 1987) (seaman could not recover punitive
damages from dredge operator's insurer).
This view has met with some resistance from legislatures, however. Several courts
have adopted the view that insurance coverage of punitive damages is contrary to public
policy, only to have their holdings superseded by state legislatures. See, eg., Northwestern
Nat. Cas. Co. v. McNulty, 307 F.2d 432, 434-35 (5th Cir. 1962), superseded by statute Va.
Code Ann. §3 8.1-42.1 (Michie 1999); Guarantee Abstract & Title Co. v. Interstate Fire &
Cas. Co., 618 P.2d 119 5 (Kan. 1980), overruled on other grounds, 652 P.2d 665 (Kan.
1982), superseded by statute, Kan. Stat. Ann. §40-2,115 (1999). American Sur. Co. v. Gold,
375 F.2d 523, 526 (1Oth Cir. 1966), superseded by statute, Kan. Stat. Ann. §40-2, 115
2. Coverage Denied, Except for the Vicarious Liability of the Insured.
The line of analysis that coverage should be denied for public policy reasons has, in
many jurisdictions, given way to an exception for the vicarious liability of the insured. Grant
v. North RiverIns. Co., 453 F. Supp. 1361, 1370 (N.D. Ind. 1978) (applying Indiana law);.
Dorsey v. Honda Motor Co., 655 F.2d 650 (5th Cir. 1981) (applying Florida law after
McNulty), modified on other grounds, 670 F.2d 21 (5th Cir.), cert. denied, 103 S. Ct. 177
(1982). The rationale for this exception is the same one asserted to deny coverage--only the
wrongdoer should be held accountable. Courts recognizing this exception allow coverage
when the insured is not the "active wrongdoer." Travelers Ins. Co. v. Wilson, 261 So. 2d 545,
548 (Fla. App. 1972). In these situations, the courts acknowledge that the insured is not
personally at fault; rather, the insured is held vicariously liable for another's wrongfid
conduct. U.S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061 (Fla. 1983); Country Manors v.
MasterAntenna Systems, 534 So. 2d 1187, 1192 (Fla. App. 1989). Thus, when an insured is
held liable for punitive damages arising out of an employee's act, it will be granted coverage
unless it is guilty of gross negligence in failing to discharge the employee. Dayton Hudson
Corp. v. American Mut Ins. Co., 621 P.2d 1155 (Okla. 1980) (applying the doctrine of
respondeat superior). The relevant inquiry is whether there are any direct acts of the insured
leading to the plaintiffs injuries.
If the insurer denies coverage, it has the burden of proving that the jury's award
was not predicated on the vicarious liability of the insured. Morrison v. Hugger, 369 So. 2d
614 (Fla. App. 1979).
Several other decisions have followed this exception. Norfolk & W. Ry. Co. v.
Hartford Accident & Indem. Co., 420 F. Supp. 92, 95 (N.D. Ind. 1976) (applying Indiana
law); Commercial Union Ins. Co. v. Reichard, 404 F.2d 868 (5th Cir. 1968) (applying Florida
law); Ohio Cas. Ins. Co. v. Weyare Fin. Co., 75 F.2d 58 (8th Cir. 1934) (applying Missouri
law). See generally Southern American Ins. v. Gabbert Jones, Inc., 769 P.2d 1194 (Kan.
V. COVERAGE ALLOWED
A growing majority of courts have rejected the policy argument set forth in
McNulty, and allow coverage for punitive damage liability. See Burrel & Young, Insurability
of Punitive Damages, 62 MARQ. L. REV. 1, 18 (1978). The leading case advancing this
view is Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d I (Tenn. 1964). The
Lazenby court noted the importance ofpunishing and deterring grievous misconduct, but
concluded that punitive awards were not successful at meeting these objectives. Thus, there
was little reason to preclude the insuring of punitive damages. Under this approach, it would
be hard to justify an award of punitive damages regardless of the availability of insurance.
It is apparent that this result was reached through a balancing of public policy and contract
principles. See also Universal Ins. Co. v. Tenery, 3 9 P.2d 776, 779 (Colo. 1934) (balancing
contract interests with public policy).
Other cases have stated that a contract should be upheld unless it had a
tendency to promote wrongful acts. Harrell v. Travelers Indem. Co., 567 P.2d 1013, 1016-17
(Or. 1977). This view proceeds from a belief that deterrence is not furthered by denying
coverage. Therefore, as long as insuring punitive damages is not shown to promote extreme
misconduct, there is no compelling reason to hold such agreements invalid. Moreover,
Harrel recognized that such contracts do not shift the burden of punitive damages to the
insurer because an extra premium for such coverage should be charged. Id. at 10 19-20.
Lastly, it was noted that the exposure to punitive damages may arise in a wide variety of
activities, and often includes normal business risks. The court concluded that a sweeping rule
of noninsurability would be unreasonable and burdensome.
One court has adopted a position that ifthe policy language is approved by the
state insurance commission, then it is not violative of any public policy. Dairyland County
Mut. Ins. Co. v. Wallgren, 477 S.W.2d 341 (Tex. Civ. App.--Fort Worth 1972).
Those cases that have found no public policy prohibiting insurance that covers
punitive damages include the following: Colson v. Lloyd's ofLondon, 435 S.W.2d 42 (Mo.
Ct. App. 1968); Valley Forge Ins. Co. v. Jefferson, 628 F. Supp. 502 (D. Del. 1986); Fagot
v. Ciravola, 445 F. Supp. 342 (E.D. La. 1978); Price v. HarffordAccident & Indent. Co., 108
Ariz. 485, 502 P.2d 522 (1972); State v. Sanchez, 119 Ariz. 64, 579 P.2d 568 (1978, App.);
Whalen v. On-Deck, Inc., 514 A.2d 1072 (Del. 1986); Greenwood Cemetery, Inc. v.
Travelers Indent. Co., 238 Ga. 313, 232 S.E.2d 910 (1977);Abbie Uriguen Oldsmobile Buick
Inc. v. UnitedStates Fire Ins. Co., 95 Idaho 501, 511 P.2d 783 (1973); Cedar Rapids v.
Northwestern Nat Ins. Co., 304 N.W.2d 228 (Iowa 198 1) overruled on other grounds, 440
N.W.2d 377 (Iowa 1989); First Natl Bank v. Fidelity & Deposit Co., 283 Md. 228, 389 A.2d
359 (1978); Anthony v. Frith, 394 So. 2d 867 (Miss. 1981); First Bank (NA.) v. Transamerica
Ins. Co., 679 P.2d 1217 (Mont. 1984); Mazza v. Medical Mut. Ins. Co., 311 N.C. 621, 319
S.E.2d 217 (1984); Brown v. Maxey, 369 N.W.2d 677 (Wis. 1985); Sinclair Oil Co. v.
Columbia Cas. Co., 682 P.2d 975 (Wyo. 1984).
VI. COVERAGE ALLOWED EXCEPT FOR INTENTIONAL TORTS
Within those jurisdictions which hold that there is no public policy bar to
coverage of punitive damages, some jurisdictions except cases of intentional misconduct.
Such jurisdictions reason that punitive damages awarded from incidents occurring due to
gross negligence can be covered because such incidents can be classified as accidents, and
may be part of the cost of doing business. However, such courts reason, intentional torts are
by definition not accidents, and should not be viewed as a cost of business. Therefore, public
policy prevents coverage of punitive damages arising from intentional torts. See Southern
Farm Bureau Casualty Ins. Co. v. Daniels, 246 Ark. 849, 440 S.W.2d 582 (1969);
Continental Ins. Cos. v. Hancock, 507 S.W.2d 146 (Ky. 1973); Harrell v. Travelers Indem.
Co., 279 Or. 199, 567 P.2d 1013 (1977); Lazenby v. Universal Underwriters Ins. Co., 214
Tenn. 639,383 S.W.2d I (1964); Hensley v. Erie Ins. Co., 283 S.E.2d 227 (W. Va. 1981).
In at least one case, however, this view has been specifically rejected. In St. Paul Mercury
Ins. Co. v. Duke University, 670 F. Supp. 630 (M.D.N.C. 1987) (applying North Carolina
law), the district court held that North Carolina public policy prevented insurance coverage
of punitive damages awarded for intentional torts. The Fourth Circuit disagreed, holding that
there was no such public policy prevention, and holding that Duke University was covered
by its insurance policy for punitive damages arising out of intentional torts. St. Paul Mercury
Ins. Co. v. Duke University, 849 F.2d 133 (4th Cir. 1988).
In general, the question of whether a standard form P&I policy (without a
specific exclusion) covers punitive damages will be determined under applicable state law,
including the particular public policy (if any) of the former state and the state whose law is
applicable to the contract of insurance. If insurers do not wish their policies to be construed
to cover punitive damages, a specific exclusion should be written into the policy or added by
a clearly worded endorsement within the policy. See The Insurability of Punitive Damages:
A New Solution to an Old Defense, 16 WAKE FORREST L. REV. 345 (1980). See also
APPLEMAN, INSURANCE LAW PRACTICE 4312; COUCH, INSURANCE, Vol. 15A
§ 56. 1.