Legal Alerts

Insurance for Punitive Damages


Whether a liability insurance policy provides coverage for punitive damages ultimately turns on the actual language of the policy. Some do; some don’t. But there is an additional nuance to the question of insurance coverage for punitive damages, which can vary according to what state’s substantive law applies.

Minnesota law makes punitive damages available according to a statutory scheme when a defendant shows deliberate disregard for the rights or safety of others. Minn. Stat. § 549.20. But punitive damages can also be awarded against a principal for the acts of an agent in certain circumstances (where the principal authorized the manner and doing of an act; where an agent was unfit and the principal deliberately disregarded this unfitness; where an agent was employed in a managerial capacity and was acting within the scope of employment; or where the principal ratified the act of the agent while knowing of its character and probably consequences).

Liability policies are generally premised a grant of coverage that the insurer will pay certain damages that the insured is legally obligated to pay. On its face, that might seem to include liability for punitive damages. But punitive damages, which are designed to punish or deter conduct, are categorically different from compensatory damages. A narrow majority, 24 states, take that approach. Twenty states (including Minnesota), however, have taken a different approach. They prohibit insurance coverage for punitive damages as a matter of public policy, reasoning that any punishment or deterrence would be lessened if the liability risk could be shifted to an insurer as a matter of contract.

But the analysis doesn’t end there. Most states that prohibit insurance for punitive damages distinguish between direct and vicarious liability. In Minnesota, for example, which prohibits insurance coverage for punitive damages as a matter of public policy, there is a statutory exception for insuring vicarious liability for punitive damages. Minn. Stat. § 60A.06, subd. 4. In other words, a principal could have insurance coverage for punitive damage liability arising out of the acts of an agent so long as the insurance policy does not otherwise exclude or limit coverage. A majority—33 of 50 states—follow this approach.

If faced with potential liability involving punitive damages, analyzing the potential for insurance coverage will involve consideration of the applicable policy language together with applicable state law, as well as pertinent facts.

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