Punitive damages have long been held as a means of punishing a defendant for malicious, willful, or fraudulent conduct and to discourage future wrongdoing. While not a new phenomenon, in recent years, the intent of these awards has been exploited by plaintiff’s attorneys seeking excessive payouts. As social inflation continues to drive jury sentiment and award size, the impact of punitive damages has never been more topical. In the paper below, we examine the current trends, the issue of insurability, and the options available for insureds to protect their balance sheets amid a challenging U.S. litigation landscape.

Trends

A recent study conducted by the Institute for Legal Reform reported that the median punitive award increased from $35M in 2017 to more than $87M in 2022. Further, the average number of punitive awards over $25M was roughly 25 awards on an annual basis. The difficulty of anticipating whether punitive damages will be awarded in a particular case, and the trend toward astronomically large amounts when they are awarded have seriously distorted settlement and litigation processes, leading to extremely inconsistent outcomes.

To understand whether the amount of a punitive damage award is reasonable, one should consider the ratio of punitive damages to the compensatory award. Historically, the U.S. Supreme Court has issued several decisions indicating single-digit ratios are appropriate in most cases; however, as this is not a bright-line rule, punitive damage ratios have increased egregiously over the past decade. While many states have adopted statutory restrictions that aim to limit the sum of punitive damages a plaintiff can win, there is no consistency in approach, rendering defendants at the mercy of the lower courts and unable to properly plan for potentially catastrophic awards.

Insurability

At present, there are 26 states that generally allow for directly assessed punitive damages to be insured, 8 states that permit insurability for vicarious liability only, and 11 states where punitive damages are either uninsurable or the law is unclear. Insurable or not, punitive damage awards can be assessed in all but three states, and without the proper protection, insureds could be left with an uninsured and unbudgeted loss to contend with. No organization is immune to punitive awards, and the larger you are, the more susceptible you become to plaintiffs’ attorneys using reptilian tactics to obtain considerable awards on behalf of their clients.

The Options

Affirmative Coverage Language

In general, most Primary and Excess Liability policies either exclude punitive damages (particularly in those states where punitives are not insurable by law) or the language is “silent,” which neither excludes nor affirmatively grants coverage. In rare instances where an insurer will agree to add affirmative punitive damage language, there is still some uncertainty as to whether the language will respond.  According to Chubb’s Review U.S. Punitive Damages Liability Landscape, “most notably, the possibility exists that a court will not enforce, or an insurer will not fulfill, the terms of the policy due to the law or public policy of a particular jurisdiction. As a result, coverage may not actually exist for a punitive award despite the insured believing that it had purchased (and perhaps paid an additional premium for) such coverage.”

Most Favored Venue/ Jurisdiction Language

Where insurability of punitive damages is prohibited (California, for example), Most Favored Venue language can provide an avenue for payment of a punitive award. MFV/ MFJ endorsements contain a choice of law provision, allowing the insured to select the law of the jurisdiction from one of the following:

1. Where the occurrence took place

2. Where punitive damages were awarded

3. Where the insured is incorporated or maintains its principal place of business or

4. Where the policy was issued (typically where the insurer is incorporated)

While these endorsements can provide a level of comfort to insureds, it should be noted that this language has not been tested and thus should not be viewed as an offshore wrap equivalent.

Punitive Wrap

Issued entirely offshore, punitive wraps are not subject to the regulatory restrictions that may prevent a U.S. insurer from indemnifying an insured for punitive damages. As the name suggests, punitive wrap policies “wrap” around a domestic policy (typically Umbrella and Excess policies but may also wrap around a primary GL policy) and are priced between 10-15% of the wrapped layer. Wraps provide a level of certainty in the face of a punitive award as they are triggered specifically when punitive damages are awarded in a state that does not allow for insurability. In other words, to ensure your balance sheet is not unnecessarily exposed to a punitive award, a wrap is the only affirmative means of doing so.

Conclusion

Punitive damages remain a significant tool for punishment and deterrence, but their growing prevalence and size, fueled by social inflation, have increased business uncertainty. The unpredictability of awards and inconsistent insurability laws highlight the importance of robust risk management. While options like affirmative coverage language, Most Favored Venue endorsements, and offshore punitive wraps offer protection, each carries its own limitations and considerations. As the U.S. litigation landscape evolves, companies must stay proactive in exploring strategies to shield their balance sheets from the financial risks posed by punitive damages.

Sample Notable Verdicts

• Johnson vs. Union Pacific- March 2023- $57M compensatory damages, $500M punitive damages (Auto Liability)

• The Family of Betty Jo McClain Thomas vs. Roy James Holden & Charter Communications- September 2022- $375M compensatory damages, $1.1B punitive damages (Premises Liability)

• Rita-Ann Chapman et al. vs. Avon Products, Inc. et al.- December 2022- $40.8M compensatory damages, $11.3M punitive damages (Product Liability)

• Hill. vs. Ford Motor Company - August 2022- $24M compensatory damages, $1.7B punitive damages (Product Liability)
  **Note: Should this verdict be upheld, the state of Georgia can collect 75% of any punitive damages issued in Product Liability cases. Thus, the state government would be able to raise $1.28 billion — over 2% of the annual state budget — from a single verdict in a lawsuit to which the state was not a party.