Punitive Damages and Liability Insurance

Abstract

The relevance of punitive damages for insurers is frequently overestimated. The reason for this is not so much that punitive damages are usually excluded in insurance contracts: Such exclusions only apply if there is a verdict that awards a certain amount of money as punitive damages. However, verdicts are rare, especially in the U.S., and settlements, which tend not to distinguish between punitive and compensatory damages, are by far the rule (in the U.S. roughly 97% of all cases that are brought to court end in a settlement). The most significant factor that limits the impact of punitive damages for insurer is the fact that punitive damages are mostly a U.S. phenomenon,1 with a few, usually quite restricted exceptions in other common law markets. Moreover, even in the U.S., only about 6% of all successful claims lead to punitive damages. In many cases, these will be awarded for intentional torts or other acts that are usually not insured (e.g. defamation cases)2. Finally, it is not always legal to insure punitive damages: About half of all U.S.-states prohibit the insurance of punitive damages for various reasons.3 Therefore, if anything, it is rather the fear of the possible imposition of punitive damages that makes defendants and their insurers likely to accept higher settlements, than actual punitive damages awards, that can be expensive for insurers. This makes it impossible to give any exact estimates of what punitive damages cost insurers at the end of the day.