Does Your Malpractice Insurance Cover Punitive Damages?
When an E&O lawsuit strikes, many professionals assume their malpractice insurance will handle any judgment or settlement. But what happens if that judgment includes punitive damages? Whether your policy will pay those damages depends on the policy wording, the state law where the case is tried, and the type of liability alleged. Once the claim is made or the act occurred finding out about punitive damage coverage is too late.
What Are Punitive Damages?
Punitive damages are not meant to compensate the injured party for actual losses that’s the role of compensatory damages. Instead, they are intended to punish especially harmful or reckless behavior and deter similar conduct in the future.
For example, if a court finds that a lawyer, doctor, or other professional acted with gross negligence, malice, or fraud, it may award punitive damages in addition to compensatory damages.
Why Coverage Is Complicated
The insurability of punitive damages is not purely a matter of what your insurance policy says, it is also determined by state law and public policy.
- State Law Restrictions
Some states expressly forbid insurance coverage for punitive damages assessed directly against the wrongdoer. The reasoning is that allowing insurance to pay punitive damages would remove the punishment aspect.
– Example: California, New York, Illinois, Florida generally do not allow insurance to cover direct punitive damages. - Vicarious Liability Exceptions
Even in restrictive states, punitive damages may still be insurable when assessed vicariously, for example, if an employer is held responsible for the actions of an employee, but the employer did not personally engage in the wrongful conduct. - Policy Language Variations
Malpractice policies differ widely. Some explicitly exclude punitive or exemplary damages. Others remain silent, leaving it to courts and state law to decide. Certain specialty insurers offer endorsements or “most favorable venue” provisions to maximize the chance of coverage.
Key Questions to Ask About Your Policy
If you want to know whether your malpractice insurance might cover punitive damages, review your policy and ask your broker or insurer:
- Does the policy define “damages”?
If punitive damages are not listed in the definition of covered damages or if they are specifically excluded that’s a red flag. - Does the policy have a choice of law provision?
Some policies include language selecting the law of a jurisdiction that is more favorable to insuring punitive damages. - Does your state allow coverage for punitive damages?
Even if your policy is silent, state law will override it. - Are there endorsements available?
In some cases, you can purchase an endorsement expanding coverage to the extent permitted by law.
Check Before Its Too Late
Punitive damages coverage in malpractice insurance is a state-specific, policy-specific question. The safest approach is to assume it is not covered unless your policy expressly states otherwise and your state allows such coverage. A proactive review can help ensure there are no surprises if the worst happens.
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Contact Me Today
Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
