Exploring potential coverage in Bermuda and the U.S. marketplace
In the ever-evolving employment law landscape, punitive damages have become an item that tends to garner a lot of publicity and make headlines. This article will provide an overview of insurability of punitive damages in the U.S. and Bermuda marketplaces.
Punitive damages are used in civil litigation to penalize the defendant. Punitive damages are typically awarded at the court's discretion when the defendant's behavior is found to be especially harmful.1 Punitive damages are awarded by either a judge or jury in civil lawsuits and are in addition to compensatory damages in civil cases. Compensatory damages are designed to compensate a plaintiff for the actual loss they have experienced. There are two types of punitive damages, direct – which are for the employer’s own wrongful acts, and vicarious – where an employer is liable for the acts of another (e.g. liability for acts/omissions of an employee). The public policy behind punitive damages is to further serve as a deterrence for the defendant, but also for other potential wrong doers.
While we see punitive damages most frequently in personal injury cases, they are increasingly being awarded in employment law cases. The reality is, that the majority of employment law litigation resolves prior to a matter going to trial, or even prior to a judgment or verdict being rendered. Nevertheless, when a matter does proceed to trial and punitive damages are awarded, the amounts can be large and tend to generate headlines, particularly in cases involving misconduct and sexual harassment in the wake of #MeToo. Punitive damages are awarded with the intent to punish egregious or serious misconduct on the part of the defendant.
In the employment law space, compensatory and punitive damages may be awarded in cases involving intentional discrimination based on a person's race, color, national origin, sex (including pregnancy, gender identity, and sexual orientation), religion, disability or genetic information.2 Punitive damages may also be awarded to punish an employer who has committed an especially malicious or reckless act of discrimination.2
While most states allow punitive damages to be insured, several jurisdictions restrict the ability of insurance companies to indemnify for certain categories of intentional conduct, including but not limited to, Illinois, California, Florida, and New York. These States (and others) have found that it is against public policy of that State to allow insurance coverage for a punitive damages award. The theory is that a person or organization committing an intentional act should not be able to offset the financial punishment of having been found guilty. Employment Practices Liability insurance (EPLI) policies often exclude any damage deemed uninsurable under the law selected to interpret the policy.
Nevertheless, there are options for employers both in the U.S. insurance market as well as Bermuda to purchase policies that provide coverage for punitive damages.
There are options for insureds who are seeking punitive damage coverage under an EPLI policy.
Most Favorable Jurisdiction (“MFJ”) language directs a court to a choice of law that maximizes the potential for punitive damages coverage under the policy and is usually offered by endorsement. In essence, it provides that the law applicable to the insurability of punitive damages under the policy will be the law which allows for coverage of punitive damages. The exact wording of this provision can vary from carrier to carrier, particularly in cases where the Insured is domiciled in states which explicitly prohibit the insurability of punitive damages.
One form of favorable venue wording provides that the policy will apply the jurisdiction that most favors coverage for punitive, exemplary, and multiple damages. Another form provides a choice of law provision through which the insured may select the most favorable jurisdiction where:
These options all have a logical connection to the policy. Thus, the choice-of-law for an insurance policy issued in the U.S. must have some relationship to the parties to the contract or to the underlying case involving punitive damages. While MFJ clauses provide some protection to an insured seeking punitive damages coverage, they only do so if one of the various choice-of-law options listed above allows for coverage of punitive damages. If all options end up being states which hold that insurance coverage for punitive damages is barred, then the court will likely preclude coverage for punitive damages under the policy. This type of coverage is typically embedded with no additional cost to the insured, but as discussed, certain events need to be present to trigger coverage, and there is not an absolute guarantee that coverage will be triggered. Accordingly, while coverage can be afforded under U.S. domestic EPLI policies, there are various factors to take into consideration and it will be claim specific as to whether a claim will have coverage under the policy.
However as further discussed below, the Bermuda marketplace is another alternative for an Insured where punitive damages are affirmatively covered and are not subject to U.S. law or interpretation.
When utilizing Bermuda insurance carriers, intentional conduct, public policy, or regulatory issues are not subject to U.S. public policy or regulatory restrictions. Bermuda EPLI placements, whether in the form of a puni-wrap policy or a standalone EPLI primary policy, are additional options for insureds.
A puni-wrap policy is generally written on an indemnity basis, with no coverage for defense costs and serves to “wrap” around an already purchased domestic EPLI policy, to provide coverage for punitive damages in cases where it is against public policy for the domestic EPLI policy to provide coverage for those damages. A puni-wrap policy is typically purchased in conjunction with a domestic EPLI policy. When contemplating purchasing a puni- wrap policy, it is important to ensure that the domestic EPLI policy does not have a punitive damages exclusion.
The puni-wrap policy does not increase the total limits available to the insured, but instead, is a “shared limit,” with payment for any compensatory damages under the domestic EPLI policy eroding the limit of liability under the puni- wrap. From a cost perspective, because a puni-wrap policy does not provide additional limits, they tend to be inexpensive, and are generally between 10-15% of the domestic policy premium. Further, the process of obtaining a puni-wrap policy is relatively simple and straightforward.
Perhaps most importantly, to trigger coverage under the puni-wrap policy, it requires a court judgment, jury award, or arbitration award. All terms and conditions of the puni-wrap policy are determined or “controlled” by the domestic EPLI policy, except regarding coverage provisions concerning punitive damages, choice of law or dispute resolution. Accordingly, if the domestic EPLI policy does not cover a claim for reasons other than because punitive damages are not covered, then there will likewise be no coverage under the puni-wrap policy. To the extent an award is in fact paid out under the puni-wrap policy, payment must be made in Bermuda to the policyholder’s Bermuda broker.
It is important to note that stand alone EPLI policies placed out of Bermuda automatically include punitive damage coverage, therefore, a puni-wrap policy is not needed; this coverage is characteristically embedded within the policy with no additional cost. Under this policy, the coverage is unequivocal and therefore, provides the most secure coverage for punitive damages. However, these policies also tend to have higher retentions. Additionally, as these policies are subject to arbitration in either Bermuda or the U.K., they grant greater protections regarding public policy arguments against punitive damages coverage than a U.S. EPLI policy does in this regard. WTW previously provided an informative glimpse into the overall Bermuda perspective, as many large EPLI buyers find this coverage the preferred option.
Punitive damages continue to remain an ever-evolving topic. When evaluating whether coverage for punitive damages is appropriate for your company’s needs, it is prudent to consult with your insurance broker and claims advocate to determine what is the best option.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
