Punitive Damages (also called exemplary damages) are awarded to:

  • Right a wrong that’s been committed against a victim
  • Punish the offender for a particularly heinous act and / or
  • Deter others from engaging in similar conduct in the future

The issue of whether to insure punitive damages has been a source of much debate, and the answer varies by state.  Most states allow punitive damage coverage. A few do not – they feel it is distracting and irrelevant to the main purpose of awarding damages, which is to right a wrong.

All states award compensatory damages to reimburse a victim for an injury sustained. If a defendant hits a plaintiff with his car, causing $500 in medical bills and $500 of lost wages, the compensatory award would be $1,000. 

Misconduct is sometimes so egregious that courts will allow juries to award punitive damages in addition to compensatory damages. Punitive damages are intended to punish and deter especially reprehensible behavior.  Using the driver/pedestrian example: what if the driver was speeding, drinking from an open bottle of whiskey, and went out of his way to hit the pedestrian?  What if he then got out of the car, spit on the pedestrian, yelled at her for getting in his way, then sped off without calling for help?  The driver’s behavior has not increased the costs of the pedestrian’s injuries, but it is appalling.  Juries can award punitive damages to punish and discourage this type of heinous behavior.

Issuing compensatory awards is objective, based on the specific costs associated with the incident.  Determining and assessing punitive damages is more of a gray area, not determined by hard costs.  

Each state establishes its own guidelines regarding insuring punitive damages and the types of acts that are insurable. In three states (Michigan, Nebraska and Washington), punitive damages are not available at all.  In most other states, the punitive damage dollar amount is capped (typically with 2:1 or 3:1 punitive-to-compensatory damages ratios). 

In states where punitive damages are admissible, judges and juries must decide if they will award them based on whether the act was simple negligence, a deliberate intent to harm, or somewhere in the middle.

The U.S. Supreme Court recently provided guidance around punitive awards, including the amounts that are allowable to award.  Although decisions vary by state and circumstance, the Supreme Court suggested no more than a 4:1 punitive-to-compensatory damages ratio. 

Another issue that varies by state: can punitive damages be paid by a defendant’s insurance?  Approximately 23 states permit insurability, while three states (Ohio, West Virginia and Utah) prohibit it. For the remaining states, the answer varies depending on whether punitive damages were assessed against the defendant directly or vicariously.  This is an important distinction: assessed punitive damages are based on the insured’s own wrongful acts.  Vicariously assessed punitive damages are based upon another’s misconduct for which the insured is held legally liable.

Paying punitive damages can carry a huge price tag. This potential vulnerability should be addressed proactively with an insurance professional to protect your organization and its assets.  The experts at MJ Kelly are available to discuss the complex and nuanced issue and provide you with expert advice.