Insure Punitive Damages Coverage

Section two is the effective date.

Justification

New York is one of only two states that completely bars insurance for any punitive damages assessed. The vast majority of states permit insur- ers to provide coverage for punitive, exemplary damages and civil penal- ties.

In New York, in 1979 the Court of Appeals determined that punitive damages were not insurable because they are designed to punish the wrongdoer and deter further misbehavior. See Hartford v. Village of Hempstead (48 N.Y. 2d 218). All subsequent New York cases on the issue have largely been constrained to follow the Hartford case. While the Hartford case remains New York's leading statement on this issue of public policy, it is a difficult one to enforce and administrate in the face of interstate commerce.

The Department of Financial Services continues to enforce that public policy, however, in recognition of the issues involving interstate commerce, it acknowledged in an Office of General Counsel opinion dated December 21, 2005 that a New York licensed reinsurer is permitted to reinsure an insurer not licensed in New York for policies with punitive damage coverage under most circumstances.

This policy set by the judiciary over thirty-five years ago has not been reconsidered despite the national trend. This legislation seeks to fix an antiquated policy and align New York State with the rest of the nation.

Today, insurance producers and insurers sell punitive damage insurance on a regular yet selective basis in almost every state. They do so because insureds desire to protect themselves from the adverse financial and business consequences of punitive damages awards, particularly when those awards arise out of strict liability or vicarious liability. Insurers sell such coverage believing they can determine appropriate rates based on an estimable range of loss costs.

New York insureds cannot buy coverage for punitive damages from New York licensed insurers or from eligible excess line insurers. New York insureds who desire this coverage are forced to purchase such insurance from insurers not regulated by New York, including off shore insurers in Bermuda and other countries beyond the jurisdiction of New York courts and beyond state regulators and regulation. While punitive damages coverage is not available for purchase within the state, the Supreme Court of the United States has held that it is legal for insureds to purchase coverage beyond the borders of the state. See State Board of Insurance v. Todd Ship Yards Corp. (370 U.S. 451). New York consumers would benefit if they could acquire such coverage through the New York regulated market where consumer protection is a paramount goal.

Any concern that coverage for punitive damages will result in insurance for intentional or criminal acts can be addressed by the way policies are written in the states that permit coverage for punitive damages. In the states that permit the insurance of punitive damages, insurance policies are written to exclude coverage for intentional acts of the named insured. Disallowing punitive damages coverage for personal lines insurance and commercial automobile liability insurance further limits the scope of permissible coverage to the most vital for commercial insureds. Specifying that coverage for punitive damages can only apply when expressly provided for by the insurance policy ensures that insur- ers and brokers are not required to offer such coverage, and courts will not find coverage without the insurance policy expressly providing for it.

The result of any large punitive damage judgment awarded in New York today is often an uncollected, hollow judgment without benefit to the aggrieved party and without punishment to a judgment debtor which files bankruptcy or otherwise ceases to do business without satisfying the punitive damage award. This proposal seeks to foster the collection of court awarded damages by the plaintiffs who received these awards.

Legislative history

S.6909 of 2016.

Fiscal implications

None.

Effective date

Immediately.