What Are Punitive Damages?
The key to the concept is found in the term "punitive" or punishment. Punitive damages are also referred to as "exemplary" damages. The objective of punitive damages is to financially punish someone for a behavior that is so "bad" that the courts want to not only punish the wrong doer but to send a message to society that this type behavior will be punished. In essence the courts make an "example" out of the person for egregious behavior or conduct (thus the name exemplary damages).
In regards to auto insurance, punitive damages are usually sought in extreme cases such as drunk driving, drag racing in a school zone, hit & run, and other types of accidents where the at-fault driver has displayed gross misbehavior.
The current "standard" for punitive damages in Arizona was established by a 1986 case - Linthicum v. Nationwide Insurance Company, 150 Ariz. 326, 723 P.2d 675 (1986) - In that decision the standard of proof for recovery of punitive damages was said to be an "evil mind" or something more than a mere commission of a tort or mere negligence. An "evil mind" is said to be present where: (a) the defendant intended to injure the plaintiff, or (b) wrongful conduct was motivated by spite or ill will, or the defendant, not intending to cause the injury, consciously pursues a course of conduct knowing that he creates a substantial risk of significant harm to others. An evil mind can also be inferred when a defendant's conduct is so outrageous or egregious that it can be assumed he intended to injure or that he consciously disregarded the substantial risk of harm created by his conduct. Gurule v. Illinois Mutual Life & Casualty Company., 152 Ariz. 600, 734 P.2d 85 (1987) In June of 1989 an Arizona Court liberalized the previous standard and held that the "evil mind" standard may also apply to cases involving intoxicated drivers.
From this definition you can see that most auto accidents would not qualify for punitive damages, however, there exist several possibilities where the injured party could and would argue that they are entitled to punitive damages. Policyholders who may never anticipate a punitive damage claim because for their ability to control their own behavior (the usual cause of punitive damage awards) need to understand that in Arizona the courts have also found employers vicariously liable for the actions of their employees. This could no doubt open up the strong possibility that vehicle owners could be found vicariously liable for the actions of others while driving their auto. In other words, Punitive Damages are a real life possibility when dealing with motor vehicles and the need for punitive damage coverages for auto accidents is clear.
Many will argue that punitive damage awards should not go entirely to the injured party, as they will be compensated under another section of the judgment or award, however, at this time in Arizona history the plaintiff is the one who receives the monetary benefit from the courts "punishing" the at-fault party. That may change at some point in the future, however, from the prospective of the defendant, punitive damage awards are a serious financial risk. The Arizona Legislature has examined this issue in recent years, and failed to make any modifications to the state or status of the law as established by current case law.
Are Punitive Damages Insurable?
Not in every state. In some states insurance companies are prohibited by law from providing "Punitive Damage" coverage. The logic being that if the objective of punitive damages is to "punish" the at-fault party, what punishment has been accomplished if an insurance company pays on their behalf. There are, however, several states that allow punitive damages to be covered by insurance, and Arizona is one of those states. Arizona Law clearly states that punitive damages are automatically covered under all liability policies UNLESS they are specifically excluded. Price v. Hartford, 108 Ariz. 485,502 P.2d 522 (1972)
Do All Auto Insurance Companies Provide Punitive Damage Coverage?
No! Many if not most private passenger auto policies in Arizona provide this coverage, however, there are some companies that have included a specific punitive damage exclusion in their policy to remove any coverage for this exposure.
How About Other Than Auto Insurance?
Punitive damage exclusions are somewhat common in other lines of insurance, but again, it depends of the specific policy and carrier. In Arizona a liability policy that excludes this coverage is inferior to one that does not – regardless of line of coverage.
Author: Lanny L. Hair, CIC, RPLU, ARM, AAI – Executive Vice President
Independent Insurance Agents and Brokers of Arizona, Inc., Phoenix