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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...