Insurance Contracts and Punitive Damages

Maybe I was wrong….?

My last post expressed my opposition to having insurance companies pay punitive damages on behalf of policyholders. I said I don’t believe the civil court should punish; the civil court role is righting wrongs, not punishing. If civil courts do punish, then the defendant should should bear the punishment, not the insurer.

Then I saw an article in the on-line edition of National Underwriter Property & Casualty where an insurer was required to pay $2.75 million in punitive damages…

This case was different from what I addressed in my blog post. The issue there was punitive damages intended to punish the insured. In this new case punishment was aimed at the insurance company.

Plaintiff claimed, and facts supported the claim, that the insurance company intentionally misinformed plaintiff about coverage available, in an attempt to avoid payment.

Plaintiff was injured in an accident. The at-fault driver carried liability insurance with a $100,000 limit. Plaintiff’s expenses exceeded that limit. The car in which plaintiff was riding carried insurance that included UIM – Under Insured Motorist coverage, with a $1 million limit. The UIM is intended for this exact situation, where an at-fault driver has coverage but with limits insufficient to cover the victim’s damages.

The insurance company told plaintiff there was no coverage. When plaintiff asked for a copy of the policy, insurer first provided an incomplete copy which omitted information about the UIM. Eventually plaintiff was provided a complete copy and used that to prove there was indeed coverage.

Insurer then paid the policy limit.

A suit by plaintiff against the insurer claimed “breach of contract, deceit, and bad faith.” A jury agreed and awarded plaintiff  $2.75 million in punitive damages.


My blog/website are intended to praise insurance and insurance companies – and now I run into this case where clearly the insurance company did bad, was guilty of breach of contract, deceit, and bad faith.

I have opposed punitive damages in civil courts – saying punishment is the role of criminal courts. But the facts of this case don’t involve criminal behavior, so the insurance company would escape punishment – in spite of obvious wrong doing – if it weren’t for punitive damages. And the punitive damages do have the desired effect of warning all insurers against bad faith handling of claims. And damages are paid by the offender (the insurance company),  not on behalf of a separate wrong-doer.

Hmmm… maybe sometimes punitive damages are in order?

A concern I’ll be addressing in future blog post is what to do when an insurance company does bad. I believe mishandling like this is exceptional, most claims are handled honestly and in good faith.

But when they aren’t maybe punitive damages are justified.

Ouch! I hate being wrong…


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