Broadly speaking there are two branches to our legal system, criminal and civil.
Criminal law is about punishment. People accused of crimes are viewed as offending the population in general, with charges framed as “The People of the city of X vs the Accused, Defendent“. Punishment is by fine or imprisonment. Fines go into the government coffers and benefit the whole population.
Civil law is about fixing a wrong. A “tort” is a wrong by one person/entity that causes damage to another, with charges framed as “Person A, Plaintiff, vs Person B, Defendent“. The remedy under civil law is to restore the damaged person to pre-tort condition. The responsible (at-fault) person pays to “compensate” the victim – hence the term “compensatory” damages. Compensatory damages include lost wages, medical bills, costs to repair or replace damaged property, and – a plaintiff attorney favorite – pain and suffering.
Often but by no means always, a person’s act may involved both criminal and civil consequences. Running a stop sign is a crime and will bring the driver into the criminal law jurisdiction. If running the stop sign causes a collision, damaging someone who had the right of way, civil law will require the driver to compensate the other driver. And the outcomes of the criminal charge does not determine the outcome of the civil (driver may be found innocent of the traffic violation but still responsible for damages to the other driver.)
Implications for Insurance
Insurance is designed to cover civil law, to pay the compensatory damages awarded against the at-fault policyholder in favor of the damaged other. Your insurance premiums are calculated based on projected compensatory damages. Insurance premiums are determined by projecting the cost of all covered events and spreading that cost among all the policyholders.
Insurance does not cover punishment for criminal acts.
Unless the court says otherwise.
Sometimes civil courts decide to assess damages beyond the actual loss suffered by the plaintiff, compensatory damages, and award an additional amount to punish the defendant, punitive damages. Sometimes called exemplary, the stated reason for this is to make an example of the at-fault person, to discourage any similar behavior in the future.
This practice raises a few interesting questions.
First, for this insurance blog: Should punitive damages be covered under the policy?
In my opinion, punitive damages should not be covered under the personal liability policy. Punitive damages are similar to a fine, which (as mentioned above) is a form of punishment employed in criminal courts. Criminal court penalties are not covered by insurance. Their intent is to punish a wrong-doer. To cover them by insurance is to frustrate the aim of punishing a wrong-doer and instead punishing the insuring population at large.
And – they increase the cost of insurance for everyone.
Second, should civil courts be punishing defendants at all?
In my opinion, no. Punishment is the role of the criminal justice system. Criminal justice has a higher standard of proof for establishing guilt – “beyond reasonable doubt” versus the civil “preponderance of evidence” – so the accused in the civil case is denied the robust defense that would be available in a criminal trial.
While punitive damages are similar to a criminal-court fine, they differ in that the damages are paid – not to the citizens of the community – but to the plaintiff (and plaintiff’s attorney). So punishment for an offense against the people enriches the individual plaintiff (and attorney), not the people. Of course this objection points to why punitive damages are popular in our legal system – they produce more revenue for the trial bar.
A third question you are probably asking: Are punitive damages covered by insurance?
I don’t know.
They definitely have been covered in the past, as back when I was adjusting claims in Michigan. But googling the question produces lots (and lots and lots) of learned discussion of the subject. In some jurisdictions, courts have ruled they are not covered as a matter of public policy: Agreeing with my point above that the punishment is ineffective if the payment is made by someone other than the defendant.
In other jurisdictions, punitive damages are payable unless the wording in the insurance policy clearly excludes them.
The cost of insurance is driven by the cost of paying for covered damages. When court decisions or public policy increase the cost of damages, that increase is reflected in the premium we pay for insurance.