Punitive Damages for the Tort of Bad Faith

A Video Explaining Insurance for Punitive Damages

Insurers generally argue that they cannot or should not indemnify or insure for punitive damage awards because to do so would defeat the punishment aspect of punitive damages. Insurance carriers typically rely, in California, on “public policy” and point to California Insurance Code Section 533. Section 533 states:

An insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.

The purpose of punitive damages is to punish wrongdoers and thereby deter the commission of wrongful acts. [Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980, fn. 13 (Neal).] In Neal, the California Supreme Court set forth three factors relevant to the assessment of punitive damages:

the degree of reprehensibility of the act;
the amount of compensatory damages awarded; and
the wealth of the particular defendant.

The primary purpose of compensatory damages is fundamentally different from punitive damages — to make plaintiffs whole, not to deter future harm. There is simply no reason why punitive damages should be limited by some fixed ratio to actual damages. [Lane v. Hughes Aircraft Co., 93 Cal.Rptr. 2d 60, 22 Cal.4th 405, 993 P.2d 388 (Cal. 2000)]

In BMW of North America, Inc. v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), the Supreme Court first announced three guideposts for assessing the constitutionality of punitive damage awards:

the degree of reprehensibility of the defendant's conduct;
the disparity between the harm or potential harm suffered by the plaintiff and
his punitive damages award; and the difference between this remedy and the civil penalties authorized or imposed in comparable cases.

BMW was the first time the Court had ever struck down a punitive damages award as unconstitutionally excessive; the Court reaffirmed BMW in questioning the size of a punitive damages award in Cooper Industries, 532 U.S. at 440-43, 121 S.Ct. 1678, and followed BMW in striking down another punitive damages award in State Farm Mutual Insurance Co. v. Campbell, 123 S.Ct. 1513, 1521-26, 155 L.Ed.2d 585 (2003) where it limited the amount of punitive damages to a small multiplier of compensatory damages.

Insurance carriers frequently cite Peterson v. Superior Court, 31 Cal.3d 147 (1982), in support of their argument. The Peterson court addressed the question of whether “imposition of punitive damages negates an insured’s coverage for compensatory damages as well as punitive damages.” It stated that “indemnification of the punitive damages is disallowed for public policy reasons.”

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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