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Insurability of Punitive Damages in North Carolina

Yesterday we discussed whether punitive damages could be awarded to a party injured in a car accident with an impaired driver and determined that they could.  That’s all well and good, but how does an injured party get this money?  Car insurance typically pays an injured party for compensatory damages but does it cover punitive damages too?  In North Carolina, the answer is yes.

Under North Carolina statute, the purposes of punitive damages are “to punish a defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts.”  North Carolina courts have held that each of these purposes must be served to award punitive damage, so that in a case where the defendant was no longer alive the purpose of punishing the defendant could not be served and punitive damages were not allowed.

Following this rationale, some have argued that if punitive damages are insured and paid by an insurance company, the defendant is not being punished, and one of the purposes of punitive damages is not being served.  Under this line of thinking, some states do not permit punitive damages to be insured.  North Carolina, however, is not one of those states.  In other states like North Carolina which allow punitive damages to be insured, courts have recognized that even though the defendant is not personally paying the punitive damages, he is still punished by likely insurance premium increases and increased difficulty in obtaining future insurance.

The first case in which the North Carolina Supreme Court addressed the insurability of punitive damages was Mazza v. Medical Mut. Ins. Co. in 1984.  In that case the court rejected that punitive damages were uninsurable as a matter of public policy.  The court held that the insuring language was broad enough to cover punitive damages and did not require the specific inclusion of punitive damages, stating:

We place great emphasis on the fact that there is no specific exclusion in the insurance contract for punitive damages. If the insurance carrier to this insurance contract intended to eliminate coverage for punitive damages it could and should have inserted a single provision stating "this policy does not include recovery for punitive damages."

In 1993, the North Carolina Supreme Court applied the insurability of punitive damages to a car accident case.  In Collins & Aikman Corp. v. Hartford Acc. & Indem. Co., a trucking company was held liable for ,500,000 in compensatory damages and ,000,000 in punitive damages in a wrongful death suit.  The parties later settled for $4,200,000.  The commercial general liability policy in that case agreed to pay on behalf of the insured "all sums which the insured ... shall become legally obligated to pay as damages."

Relying on Mazza, the court stated that “if the terms of an insurance contract provide coverage for punitive damages, public policy does not prohibit such coverage.”  The insurance company in Collins argued that the insurance policy excluded “fines” and “penalties” and punitive damages were essentially a penalty, so the policy effectively excluded punitive damages.  The court disagreed with the insurance company, stating that the term “penalties” was vague and must be defined narrowly because

It is well established that if an exclusionary clause in an insurance policy is not expressed plainly and without ambiguity, then the exclusion will be construed in favor of the insured. "The reason for this rule is that the insurance company selected the phrase to be construed and should have specifically excluded the risk if there was any doubt."

Another 1993 case, Boyd v. Nationwide Ins. Co., upheld an award of punitive damages in an automobile accident case under a business auto policy.  In that case, the court relied again on Mazza and stated that

The holding and instruction of Mazza combined with the time honored proposition that insurance policies are construed against the insurer who selected the language of the contract, sufficiently forewarned Nationwide that if it chose not to be explicit in its policies it might be subject to punitive damages in fields other than medical malpractice.

Especially relevant to yesterday’s discussion of punitive damages in the context of a car accident with an impaired driver is the 1994 case, New South Ins. Co. v. Kidd.  In that case, the North Carolina Court of Appeals applied the rationale in Mazza to a case in which Kidd was injured in a car accident with a driver under the influence of an impairing substance.  At trial, Kidd was awarded $5,000 in compensatory damages and $45,000 in punitive damages.  The defendant’s insurance company then brought a declaratory judgment action against Kidd to determine the insurance company’s liability for the punitive damages.

The New South Insurance policy provided coverage for “damages for bodily injury or property damage for which any insured becomes legally responsible because of an auto accident” but excluded liability coverage for any person “who intentionally causes bodily injury or property damage.”  The insurance company went on to argue that because the policy excluded damages from intentional acts and because the jury found that the defendant acted willfully and wantonly, it was not responsible for punitive damages.

In New South, the jury instructions defined wanton and willful conduct as

An act is done willfully when it is done purposefully and deliberately in violation of the law, or when it is done knowingly and of set purpose, or when the person acts with a reckless and total indifference to the rights and safety of others. An act is wanton when it is done of wicked purpose, or when done needlessly, showing a reckless indifference to the rights and safety of others.

The court rejected the insurance company’s argument, reasoning that

This cause of action arises from allegations that [the defendant] operated a vehicle under the influence of an impairing substance and carelessly and heedlessly. There were no allegations that [the defendant’s] conduct was deliberate or intentional in nature. Therefore, based on the above instructions and the facts of this case, we find that the jury's finding of willful and wanton conduct does not support a finding that the conduct in question was intentional.

The insurance company then tried to distinguish its case from the previous cases because it was a personal auto policy, but the court noted that “none of the aforementioned cases has specifically stated that its holding is limited to its specific area.”  In fact Mazza, Collins and Boyd “all reached the same conclusion: an insurance policy must explicitly state that it does not provide coverage for punitive damages. Moreover, our Court in Boyd definitively stated that those who “chose not to be explicit in its policies ... might be subject to punitive damages in fields other than medical malpractice.””

Therefore, case law in North Carolina is clear that punitive damages are insurable unless there is specific language excluding punitive damages rather than a general exclusion of “penalties.”  North Carolina statute also specifically permits the exclusion of punitive damages from insurance policies.  G.S. 58-41-50(a) states that “With respect to liability insurance policy forms, an insurer may exclude or limit coverage for punitive damages awarded against its insured.”

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