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An Insurer’s Liability For Punitive Damages In An Excess Judgment

June 7, 2005

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 19, #3, p. 27 (June 7, 2005). © Copyright Butler 2005.

Ging v. American Liberty Insurance Company, 423 F.2d 115 (5th Cir. 1970) is a case often cited for the proposition that third party insurers who act in bad faith could be held liable for punitive damages awarded against their insureds. However, the strength of this proposition appears to depend upon the extent to which a jurisdiction would permit the insurability of punitive damages. Those jurisdictions that permit coverage for punitive damages would also likely permit recovery of those damages later as a result of the carrier’s bad faith. Jurisdictions whose public policy precludes insuring against punitive damage awards, may be more reluctant to permit recovery in a later bad faith action, depending upon the nature of the liability giving rise to the punitive damage award.

I. Rationale For No Coverage Of Punitive Damages

Northwestern National Casualty Company v. McNulty, 307 F.2d 432 (5th Cir. 1962), illustrates the proposition that it is against public policy to provide coverage for punitive damages. This is because punitive damages are assessed “to punish the offender and act as an example and warning to the community.”[1] Further, Florida courts characterize punitive damages as a penalty “and to no significant extent compensation.”[2] The McNulty court found that, where the policy considerations in awarding punitive damages are punishment and deterrence, the damages should rest ultimately with the party nominally responsible for the wrong and shifting the burden to the insurer would frustrate this purpose and ultimately be passed to the insurance purchasing public.[3]

The prohibition against coverage for punitive damages has evolved in Florida since McNulty. Today, “Florida public policy prohibits liability insurance coverage for punitive damages assessed against a person because of his own wrongful conduct” but does not preclude coverage for punitive damages where the insured is merely vicariously liable for another’s wrong.[4] The Florida public policy “of allowing punitive damages to punish and deter those guilty of aggravated misconduct” is not frustrated when the vicariously liable party is not guilty of any active wrongdoing.[5]

“Punitive damages cannot be assessed for mere negligent conduct, but must be based on behavior which indicates a wanton disregard for the rights of others.”[6] Even gross negligence, by itself, will not support an award of punitive damages.[7] There must be a wilful and wanton disregard for the rights of others.[8]

Like Florida, New York has a “well-established policy against indemnification for punitive damages.”[9] This is because they “are not designed to compensate an injured plaintiff for the actual injury. . . their only real purpose is to punish and deter the wrongdoer.”[10] Ging does not expand this notion or provide an additional exception to the prohibition against insuring punitive damages.

II. Rationale For Coverage Of Punitive Damages

Jurisdictions allowing coverage for punitive damages do so primarily on two bases: that the policy fails to explicitly exclude coverage for punitive damages and that there is a distinction between intentional conduct and gross negligence. First, these courts hold that the language of the policy requiring the insurer to “pay all sums the insured becomes legally obligated to pay as damages” does not exclude sums awarded as punitive damages.[11]

Courts finding that the policy, interpreted broadly, provides coverage for punitive damages next turn to whether any policy exclusions remove that coverage.[12] The Hensley court reviewed the policy exclusion for “coverage for damages resulting from an intentional act of the insured” and found that the company then “intended to cover punitive damages arising from gross, reckless or wanton negligence.”[13]

Finally, these courts ultimately find that the state’s public policy either does not, or would not under the circumstances presented, prohibit coverage for punitive damages. As explained by the court in Byers, to hold that public policy precluded coverage in this instance would partially void the private contract.[14] Further, citing another Louisiana case, Creech v. Aetna Casualty & Surety Company, 516 So. 2d 1168 (La. Ct. App. 1987), the court recognized that a:

Substantial distinction exists in degree of culpability between intentional acts and wantonly reckless acts such as drunk driving. . . .  Wanton negligence is still negligence and from a public policy standpoint should not be precluded from insurance coverage. . . .  The insurance company can charge the insured a premium for coverage of exemplary damages. To the extent that such damages exceed the policy limits, there is no shift in the payment of damages. Although the purpose of punitive damages is to punish and deter, the injured party receives the benefit of such payment and from the plaintiff’s standpoint, punitive damages are additional compensation for the egregious conduct inflicted upon him.[15]

III. Courts Not Permitting Recovery Of Punitive Damages Awarded Against An Insured As Compensatory Damages In Bad Faith Cases

Courts declining to allow punitive damages awarded in the underlying action to be recovered as compensatory damages in a subsequent bad faith suit do so because the strong public policy against indemnification for such damages prohibits such an award. Other courts often fail to reach the issue by instead deciding that the insurer did not act in bad faith.

A. Indemnification For Punitive Damages Is Against Public Policy

Soto, supra, specifically addressed the question of whether punitive damages awarded against an insured are recoverable as compensatory damages in a suit against an insurer for bad-faith refusal to settle. The New York Court of Appeals held that punitive damages are not a proper element of the compensatory damages recoverable for bad faith refusal to settle.[16]

In so holding, the court looked at the consequences of an insurer’s failure to meet its good faith obligation and explains that “while the relief an insured seeks in an action for bad faith is more in the nature of compensation that indemnification, the nature of the underlying reason for the recovery, i.e., a civil punitive damage award, cannot be ignored.”[17] Relying on New York’s strong public policy against indemnification for punitive damages, the court explained that the principle that “no one shall be permitted to take advantage of his own wrong” would not be “vitiated by the existence of an entirely separate and analytically distinct wrong on the part of the insurer.”[18] The Court of Appeals elaborated:

An insurer’s failure to agree to a settlement, whether reasonable or wrongful, does no more than deprive the insured of a chance to avoid the possibility of having to suffer a punitive damage award for his or her own misconduct. Regardless of how egregious the insurer’s conduct has been, the fact remains that any award of punitive damages that might ensue is still directly attributable to the insured’s immoral and blameworthy behavior.[19]

In Florida, Ging is often cited for the proposition that Florida could allow recovery of punitive damages in a bad faith suit as compensation for the bad faith. Ging, however, did not decide the issue. The court did not even decide “whether the policy imposed a duty on the insurer to defend against a claim for punitive damages when it was joined with a claim for compensatory damages.”[20] The court held only “that once having undertaken the defense of a non-covered claim, the insurance company is under an obligation to act in good faith toward its insured to the entire extent of its undertaking.”[21]

After trial, Ging, the personal representative for the estate of Father Morgan who eventually died as a result of injuries sustained in an auto collision, filed an action against American Liberty, the tortfeasor’s insurer, alleging that it acted in bad faith by failing to apprise the insured of settlement offers within a reasonable time after settlement had been made; failing to adequately warn the insured of the likelihood of an uncovered punitive damage verdict; failing to advise the insured of the outcome of the underlying suit in a reasonable time; and failing to conduct settlement negotiations in good faith.[22] American Liberty denied the allegations and alleged that the insured’s failure to cooperate voided the policy and caused the large punitive damages verdict.

After reviewing the entire course of American Liberty’s conduct, the court highlighted the following: American Liberty wrote the insured that it was defending the entre lawsuit, the insured could retain his own counsel with regard to the punitive damages claim, and that no action taken by American Liberty during the course of the defense would waive its right to deny payment of any punitive damages awarded.[23] Further and prior to trial, Ging offered to settle all claims within the policy limits. Despite Ging’s request, American Liberty did not forward the offers to settle to the insured, did not inform him of the offers until just before trial, never told the insured he could contribute to settlement, never advised the insured that his financial status would weigh heaving in keeping the punitive damages award to a minimum and did not inform the insured of the verdict for over five months.[24]

In reversing summary judgment for the carrier, the Fifth Circuit found that American Liberty knew that the attorneys it employed “were the only attorneys representing the insured and that counsel actively represented both the insurer’s and the insured’s interests throughout the pre-suit period, preparation for trial, the trial and all post-judgment procedures.”[25]

Although the Fifth Circuit cited McNulty and recognized Florida’s strong public policy against insuring payment for punitive damages, the court explains that this is not a question of whether public policy would allow coverage in this instance. The question decided by the court turned on a jury’s determination of whether American Liberty had acted in good faith during settlement negotiations. The Fifth Circuit explained that McNulty “defines a duty of full and fair disclosure between insured and his insurer. It therefore reinforces rather than foreshortens an insurance company’s obligation to defend its insured where the company did not tell the insured that its defense of the litigation would not afford a defense for the punitive aspects thereof, but where to the contrary, it undertook to make an entire defense and still now insists that its defense as made covered all allegations of the complaint.”[26]

The Fifth Circuit explained that the complaint at issue alleged a breach of a single duty to defend the insured “from all aspects of the litigation filed against him, a duty allegedly owned and assumed even prior to the filing of the suit by undertaking settlement negotiations and one which allegedly continued and was undertaken past judgment and up to the time when the possibility of appeal expired.”[27] The court then explained that “if such a duty was owed or undertaken, it included. . . the conduct of settlement negotiations in good faith to the interests of the insured wherever those interests might be divergent from the interests of the insurance company.”[28] The Fifth Circuit then reversed the trial court and remanded the case for a determination of whether the insurance company fulfilled its good faith obligation “toward its insured to the entire extent of its undertaking.”[29]

Although the court did not determine whether American Liberty was in bad faith, it alluded that, if a jury found American Liberty to be in bad faith, American Liberty would be responsible for the entire damage award, including punitive damages. This is not because Ging created another exception to the public policy against insuring against punitive damages but because the insurer would be in bad faith and then responsible for the entire undifferentiated damages award.[30]

B. The Insurer Was Not Acting In Bad Faith

Ging explains that the insurer’s duty of good faith extends to the defense of all claims, not simply those for which indemnification will ultimately be required.[31] In the following California cases, the court faced bad faith suits in which punitive damages were sought. Like Ging, these courts did not reach the question of whether the underlying punitive damages were available as compensatory damages in the bad faith action because the courts found that the insurer was not acting in bad faith.

In Homestead Insurance Company, Inc. v. Cornish & Carey Residential, Inc., 1993 WL 255486 (N.D. Cal. 1993), the court granted summary judgment in favor of Homestead on the claims of breach of contract and bad faith brought by Cornish. Cornish and its agent were sued by a disgruntled home seller. Homestead defended under a reservation of rights to deny coverage because the emotional distress, fraud and punitive damage claims were not covered by the policy.

Prior to trial, the home seller offered to settle all claims for an undifferentiated amount. Both Cornish and Cumis counsel felt the case could be defended. During the trial, it became clear that to Cornish’s attorney that the seller might recover a substantial verdict so Cornish directed Homestead to settle “for whatever amount was required to settle it within the policy limits” in order to avoid exposing them to liability for uncovered claims including punitive damages.[32] Homestead’s attorney responded that it would offer no more than $50,000 representing Homestead’s reasonable evaluation of the covered claims and further explained that there was no risk of personal exposure on covered matters as there was $5 million in total coverage. Finally, Homestead’s attorney advised Cornish to negotiate a separate settlement for uncovered matters if it wished.

After the verdict, Homestead indicated it would make a substantial offer of $500,000 prior to the completion of the punitive damage phase and that Cornish might wish to contribute in consideration for the uncovered emotional distress and punitive damages. Cornish refused to contribute. Homestead offered $650,000, an amount equal to the arguably covered claims, and received a counteroffer of $1.3 million. Cornish again refused to contribute. The jury returned a $1.5 million punitive damages verdict which was compromised resulting in a combined total judgment of $1,226,000 of which Homestead paid $700,000.

Cornish sued Homestead for bad faith, alleging Homestead was obligated under the policy to seek to dispose of the entire action when it could have reasonably done so within the policy limits and that duty extended to covered claims as well as those Homestead contended were outside of coverage. In granting summary judgment for Homestead, the court found, as a matter of law, that an insurer otherwise acting in good faith, “does not breach the policy of act in bad faith because it refuses to make a settlement offer sufficiently high enough to dispose of uncovered claims.”[33] The court cited Ging and explained that a carrier may be held liable for uncovered claims where it acted in bad faith by refusing to provide a defense or failing to make a good faith offer which exposes the insured to excess damages. Additionally, if the insured tendered an amount reasonably representative of the uncovered claims, the insurer could be liable for the entire judgment if it refused to supplement that amount with an amount reasonably representative of the covered claims. Here, however, the insured refused to contribute a reasonable amount for the uncovered claims three times prior to completion of the judgment. The court recognized that the insurer was entitled to take its own interests into account, even when the amount was within the policy limits when the demand included uncovered claims and found that “Homestead took no position in the settlement which preferred its interests over the covered interests of its insured or otherwise acted in bad faith.”[34]

Similarly in Aguerre, Inc., v. American Guarantee and Liberty Insurance Company, 68 Cal. Rptr.2d 837 (Cal. Ct. App. 1997), the insurer could be liable in bad faith for coercing the insured to contribute to settlement by using the insured’s fear of a punitive damages award, but that the insured alleged insufficient facts to support such a claim. The court recognized that California public policy bars indemnification against punitive damages. However, “the insurer’s obligation to defend extends to punitive damage claims, provided the policy does not conspicuously disclaim this duty.”[35] The California court cites Ging as consistent with California’s general rules “that the insurer, though not liable to indemnify against punitive damages, must reasonably assist and cooperate with the insured in defending and settling punitive damage claims.”[36]

IV. Courts Permitting Recovery Of Punitive Damages Awarded Against An Insured As Compensatory Damages In Bad Faith Cases

Courts allowing recovery of punitive damages in the context of a bad faith case appear to do so for two reasons. First, an insurer is required to indemnify an underlying punitive damage award where the particular jurisdiction does not find that public policy precludes insuring against punitive damages. Second, indemnification is required in a bad faith suit where coverage for the specific underlying punitive damage award would not be precluded as an exception to the general public policy against indemnification for punitive damages.

A. Coverage For Punitive Damages Does Not Offend Public Policy

The cases cited above allowing insurance coverage for punitive damages do so primarily because of the policy language and their characterization that gross negligence lacks the requisite intent for conduct the insurer intended to exclude under the policy. Importantly, the cases allowing punitive damage coverage almost exclusively involve factual situations in which the plaintiff was injured in an automobile collision involving an intoxicated tortfeasor.[37] These cases all recognize “that the injured party does benefit from an award of punitive damages.”[38] Thus these courts recognize punitive damages as “additional compensation for the egregious conduct inflicted upon [plaintiff].”[39] With the exception of Hensley, however, none of these cases address coverage for punitive damages in the context of a suit for bad faith.

In Hensley, the underlying plaintiffs sued the intoxicated tortfeasor for compensatory and punitive damages after sustaining injuries in an automobile collision. The plaintiffs offered to settle for the $10,000 policy limit available to each of them ($20,000 aggregate for a single accident). The insurer refused and refused a subsequent request to settle for the limits from its insured. The verdict resulted in compensatory damages in excess of the policy limits and separate punitive damages. The insurer paid the policy limits on the judgment and the plaintiffs subsequently filed a direct action against the insurer.

The Supreme Court of Appeals of West Virginia explained the analysis as follows: “[i]n an excess suit, the recovery of punitive damages initially awarded in an underlying negligence action depends upon whether an insurance carrier may be held liable for punitive damages under the language of its insurance contract. If this liability is found, then we must determine whether there is some public policy against insurance coverage for punitive damages.”[40]

After determining that the “all sums” language of the policy included punitive damages and there was no express exclusion for those damages in the policy, the court turned to the question of West Virginia public policy. The court drew a distinction between coverage for a “purposeful or intentional tort” and “coverage for punitive damages founded upon gross, reckless, or wanton negligence.”[41] The West Virginia court cited McNulty as the “leading case holding that public policy precludes insuring against punitive damages.”[42] In ultimately finding that West Virginia public policy does not preclude coverage for punitive damages and holding that “a cause of action does exist under the insurance policy in the present case for coverage for punitive damages assessed upon gross, reckless or wanton negligence,” the Supreme Court of Appeals of West Virginia distinguished McNulty.[43]

After dismissing the concerns articulated by the McNulty court, the Hensley court explained that courts rejecting the public policy arguments tend to follow and expand on Lazenby, supra.[44] Hensley explained that gross negligence is, “nonetheless a species of negligence and therefore, from a public policy standpoint, should not be precluded from insurance coverage.”[45] Thus, the court explained that “where the insurance carrier has broadly defined coverage through its ‘all sums’ clause, the insured has a reasonable expectation of coverage for his acts of gross, reckless or wanton negligence, unless of course they are expressly excluded.”[46] The court continued that to invalidate the coverage on public policy grounds interfered with the traditional right of freedom of contract and the insurer would presumably charge a premium for this service and only be exposed to the extent of the limits.[47] Further, although West Virginia, like McNulty, follows the traditional rule that punitive damages are awarded to punish and deter, “[t]here does not seem to be any reason to fail to acknowledge that the injured party does benefit from an award of punitive damages.”[48]

B. Coverage For Punitive Damages Is An Exception To Public Policy

Hensley points out that while McNulty was decided under Florida law, “the public policy prohibition in regard to insurance against punitives in Florida is not without exception.”[49] Hensley cites Morrison v. Hugger, 369 So, 2d 614 (Fla. 2d DCA 1979) for the proposition that coverage for punitive damages is allowed in vicarious liability situations and Ging as an example that the insurer “could be held liable in an excess suit for the punitive damages assessed against the insured even tough punitives were a noncovered policy item.”[50]

As described in Hensley and Bould, Florida continues to adhere to the strong public policy that indemnification for punitive damages is not permitted but finds an exception for punitive damages awarded on a solely vicarious basis. Two jurisdictions have carried applied this exception in determining whether punitive damages can be awarded as compensatory damages in a bad faith action.

In Magnum Foods, Inc. v. Continental Casualty Company, 36 F.3d 1491 (10th Cir. 1994), the Tenth Circuit was deciding this precise issue under Oklahoma law. The court first recognized Oklahoma’s strong public policy against insuring punitive damages and the exception for vicarious liability. The court then explained that it was necessary to determine “which type of liability was imposed here in the state court awarding punitive damages.”[51] The court determined that the liability was not vicarious and indemnification for that kind of punitive damages is against Oklahoma public policy.

However, the inquiry did not end there because the insurer, like American Liberty in Ging, argued that it never had a duty to protect its insured from exposure to uninsurable punitive damages. The court disagreed. Recognizing the breadth of the duty to defend, the court held that “where both compensatory and uninsurable punitive damages are sought” and the insurer assumed the defense of the entire suit, “the presence of the punitive claim” does not absolve the insurer “from its obligation of good faith in handling the entire case.”[52]

Like Aguerre, the court explains that the “duty of good faith does not include settlement or a contribution to settlement by [the insurer] of the uninsurable punitive claim” however, that duty includes working cooperatively with the insured “throughout in both defending and attempting to settle the entire case, with fair consideration given to [the insured’s] concerns because of its exposure to the uninsured punitive claim.”[53]

Magnum indicates that if the insurer was found to be in bad faith and the punitive damages were awarded on a vicarious basis, that the underlying punitive damages would be awarded as compensation in the bad faith suit. As described above, Florida has not yet addressed this issue but picking up where Ging left off, would likely follow the rationale of Magnum and allow punitive damages awarded vicariously in the underlying action, for which there would be coverage under Florida law, to be recovered as compensatory damages in a later bad faith action.

V. Conclusion

Ging v. American Liberty Insurance Company, 423 F.2d 115 (5th Cir. 1970) is a case often cited for the proposition that third party insurers who act in bad faith could be held liable for punitive damages awarded against their insureds. While Ging does present this possibility, the strength of this proposition appears to depend upon the extent to which a jurisdiction would permit the insurability of punitive damages. Those jurisdictions that permit coverage for punitive damages would also likely permit recovery of those damages later as a result of the carrier’s bad faith. Jurisdictions whose public policy precludes insuring against punitive damage awards, may be more reluctant to permit recovery in a later bad faith action, depending upon the nature of the liability giving rise to the punitive damage award.


  1. McNulty at 435.
  2. Id. at 436.
  3. McNulty at 440—1.
  4. U.S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061, 1064 (Fla. 1983). Accord Dayton Hudson Corp. v. American Mut. Liability Ins. Co., 621 P.2d 1155, 1156 (Okla. 1980)(public policy prohibits insurance coverage of punitive damages except where the punitive liability is solely vicarious).
  5. Bould at 1064; contra Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 642 N.E.2d 1065, 1070 (N.Y. 1994)(imposition of vicarious punitive damages can significantly advance the deterrence goal and thus are not excepted from the public policy prohibition against providing coverage for punitive damages).
  6. Bould at 1064.
  7. Id.
  8. Id.
  9. Soto v. State Farm Ins. Co., 635 N.E.2d 1222, 1223 (N.Y. 1994).
  10. Id. at 1225.
  11. See e.g., Louviere v. Byers, 526 So. 2d 1253 (La. Ct. App. 1988), Hensley v. Erie Ins. Co., 283 S.E.2d 227 (W.Va. 1981); Anthony v. Frith, 394 So. 2d 867 (Miss. 1981); Southern Farm Bureau Cas. Ins. Co. v. Daniel, 440 S.W.2d 582 (Ark. 1969); and Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1 (Tenn. 1964)(holding policy language “all sums. . . as damages” provides coverage for punitive damages).
  12. See e.g., Hensley at 229.
  13. Hensley at 230 and Byers at 1256—7.
  14. Byers at 1256 (citation omitted).
  15. Byers at 1256—7 (citing Creech at 1173). Accord Lazenby and Hensley, supra.
  16. Soto, 635 N.E.2d at 355.
  17. Soto at 354.
  18. Id. at 354—5.
  19. Id. at 355.
  20. Ging, 423 F.2d at 121.
  21. Id.
  22. Ging at 118.
  23. See Ging at 117.
  24. See Ging at 118.
  25. Id.
  26. Ging at 120.
  27. Id.
  28. Ging at 120—1 (emphasis supplied).
  29. Ging at 121. See also Allstate Indemnity Co. v. Oser, 893 So. 2d 675, 677 (Fla. 1st DCA 2005)(allowing bad faith litigation to continue where the question of the insurer’s liability was a mixed question of law and fact: whether, even without BIL coverage, Allstate owed [its insured] a duty to settle Oser’s claims against her for both BIL and property damage because it either expressly undertook such duty or because the circumstances created a duty).
  30. Compare Duke v. Hoch, 468 F.2d 973, 979 (5th Cir. 1972)(failure of the insurer to notify the insured of the divergence of interests regarding covered and uncovered claims and the ability to seek an allocated verdict form relieves the insured of the burden of proving covered vs. noncovered damages and renders the insurer liable for the entire undifferentiated verdict).
  31. See e.g., Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So. 2d 810, 813—814 (Fla. 1st DCA 1985)(where a complaint alleges acts/damages falling within the coverage of the policy and outside the policy’s coverage, the insurer is obligated to defend the entire suit).
  32. Homestead at 1.
  33. Id. at 2.
  34. Id. at 3.
  35. Aguerre at 841.
  36. Id. at 842.
  37. E.g., Byers, Lazenby, Hensley and Frith.
  38. Hensley, 283 S.E.2d at 183.
  39. Byers, 526 So. 2d at 1256—7 (citation omitted).
  40. Hensley at 174.
  41. Hensley at 178.
  42. Id. at 179.
  43. Hensley at 184.
  44. Hensley at 180.
  45. Id. at 181.
  46. Id.
  47. Id. at 182.
  48. Hensley at 183.
  49. Hensley at 179, n.9.
  50. Id. (emphasis added).
  51. Magnum at 1499.
  52. Magnum at 1506.
  53. Id.