Punitive damages: public wrong or egregious conduct? A survey of New York law.

• Author: Leventhal, John M.

I. INTRODUCTION

New York's punitive damages jurisprudence has oftentimes been confusing. Courts have at times required plaintiffs to establish a public wrong in order to award punitive damages. (1) At other times, courts have required plaintiffs to establish egregious conduct. (2) This article provides a historical perspective of punitive damages and the rationales for their imposition. This article then references relevant case law to examine legal determinations of punitive damage awards in tort, fraud, breach of contract, breach of fiduciary duty, and General Business Law ("GBL") section 349 causes of actions, particularly when a public wrong is required to warrant such an award.

II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF PUNITIVE DAMAGES

The concept of punitive damages was present in the oldest recorded legal systems: Babylonian law in the Code of Hammurabi, Hittite Laws of approximately 1400 B.C., the Hebrew Covenant Code of Mosaic Law c. 1200 B.C., and the Hindu Code of Manu c. 200 B.C. (3) Anglo-Saxon law included a related practice which required wrongdoers to pay money damages for almost every type of crime, including homicide. (4) For example, in many enumerated crimes in the Laws of Wihtred, (5) the wrongdoer was subject to either a physical punishment or a fine payable to the victim. (6) If the wrongdoer killed another man, he was bound to pay the man's family a certain price, which was his wergild, or "man-payment," based upon the deceased's social rank. (7) The purpose of the payment was compensatory, rather than penal, and also served to maintain the peace in a society where revenge feuds were common. (8) These payments differed from the modern concept of punitive damages because they did not consider the egregiousness of the wrongdoing, but rather the nature of the injury. (9) Nevertheless, courts sometimes considered the circumstances behind the crime when determining whether or not to impose wergild payments on a wrongdoer. (10)

Early English law codified a court's common law ability to impose punitive damages. (11) The first of such statutes appeared in 1275 (12) and was followed by many others until 1753. (13) The first English cases awarding punitive damages are purported to be Wilkes v. Wood (14) and Huckle v. Money. (15) In Huckle, the court awarded exemplary damages (to make an example of the wrongdoer) to a man who was unlawfully detained on governmental orders, even though he suffered neither physical injury nor economic loss, because the action was "worse than the Spanish Inquisition." (16) In addition, it is believed that juries had often awarded punitive damages even before this remedy was officially codified. (17)

The first reported case awarding punitive damages in the United States was Genay v Norris, (18) in which a plaintiff was awarded exemplary damages after a physician spiked his drink following their altercation. (19) In 1851, in Day v. Woodworth, (20) the Supreme Court first acknowledged the states' past practices of awarding punitive damages. (21)

As early as 1817, New York cases referred to extra-compensatory damages as "smart-money." (22) This term referred to the manner in which courts awarded extra-compensatory damages as "consideration in amends for the pain which [the victim] has unjustly suffered." (23) In other words, courts awarded damages that did more than compensate an injured party, because the defendant caused an injury that hurt or "smarted." In this way, early "smart-money" resembled the modern-day concept of compensatory damages for pain and suffering. (24)

Eventually, the term "smart-money" took on a more punitive connotation. (25) "Smart-money" referred to the pain or "smart" caused to the defendant who was required to pay above and beyond compensation. (26) In New York, "smart-money" has become synonymous with "vindictive damages," (27) "exemplary damages," (28) and "punitive damages," (29) as articulated in Fry v. Bennett, (30) smart-money awards "are given in consequence of the wantonness of the wrong, and not merely on account of the suffering, discomfort and disgrace caused by them to the plaintiff." (31)

III. RATIONALES BEHIND PUNITIVE DAMAGES IN NEW YORK

Although they exist in the civil system, New York has historically viewed punitive damages as somewhat penal in nature. (32) Punitive damages were at first not assessed separately, but were imposed as part of compensation to victims for non-objectively valued injuries like physical pain and suffering, or false imprisonment. (33) Once New York courts began to allow compensatory recovery for physical pain and suffering, punitive damages were often justified on the grounds that a plaintiff should be able to recover for emotional pain and suffering, and offense to the plaintiffs character. (34) As the court said in Goines v. Pennsylvania Railroad Co., (35) punitive damages are partially "intended to solace the plaintiff for mental anguish, laceration of his feelings, shame, degradation." (36) Nevertheless, New York courts differentiated punitive damages from damages based on mental pain and suffering. (37)

Critics have argued that punitive damages should be dispensed with since emotional pain and suffering has now been incorporated into the calculation for compensatory damages. (38) These critics further assert that while punitive damages are a form of punishment, they do not include the constitutional safeguards and limits guaranteed to criminal defendants. (39) It is questionable however, whether punitive damages violate the constitutional prohibition against "double jeopardy," for a person may be criminally sanctioned and made to pay punitive damages for the same conduct. (40) That contention is especially questionable considering that such a penalty is not criminal in nature. (41) Moreover, some critics have further noted that even if a wrongdoer should be fined to make an example of his conduct, the plaintiff does not deserve to reap a windfall. (42)

IV. GENERAL OBSERVATIONS ABOUT PUNITIVE DAMAGES IN NEW YORK

Despite these long-running criticisms, New York courts have consistently awarded punitive damages. (43) New York currently adopts a rationale for punitive damages that embodies the retributive, specific, and general deterrent elements of criminal punishment. (44) Additionally, New York courts have observed that punitive damages are justified because the prospect of such an award may induce a plaintiff to sue a wrongdoer when the plaintiff might not want to be involved in criminal proceedings. (45) Moreover, scholars often employ economic arguments regarding the deterrent effects of punitive damages in support of the remedy. (46) Finally, New York courts have suggested that punitive damages are justified as an expression of public condemnation of wrongful conduct. (47)

V. INSURING AGAINST PUNITIVE DAMAGES

Punitive damages may be awarded in tort cases where the wrongdoer's action rises to a sufficiently high level of moral turpitude--often to a level associated with a criminal indifference to civil obligations. (48) Accordingly, insurers in New York are forbidden from indemnifying policyholders against punitive damages awards. (49) Insurance coverage against punitive damage awards would nullify New York's public policy that punitive damages may be assessed to punish a tortfeasor for acts of moral turpitude or criminally indifferent conduct. (50) To allow such insurance coverage would remove the deterrent effect against similar conduct. (51)

VI. AS A CAUSE OF ACTION/PLEADING

Punitive damages are not required to be pled as a separate cause of action in New York. (52) Although case law has described punitive damage claims as "parasitic" (53)--in that they depend on an underlying cause of action--they nonetheless require an additional showing of wantonness or malice. (54) Moreover, public policy considerations--rather than personal compensatory

considerations--justify awards of punitive damages. (55)

VII. IMMUNITY AND INDEMNIFICATION

New York State and its political subdivisions are immune from punitive damages, unless the state expressly waives immunity. (56) New York State does not expressly waive its immunity to punitive damages by, for example, allowing plaintiffs to name it as a defendant in tort actions. (57) Similarly, other New York legislative enactments retain the state's immunity from punitive damages. (58) Awarding punitive damages against the State would not advance the goals of this remedy--the taxpayers who fund the award are the same people who are supposed to benefit from the deterrence. (59)

New York has historically afforded immunity to parties involved in master-servant suits. (60) For example, New York State law has immunized third parties, who wrongfully injured an employee, from punitive damage liability if the employer sued them for lost services. (61) Instead, the master could only receive compensatory damages for the value of the lost services. (62) Similarly, as the doctrine of respondeat superior did not apply to punitive damages, courts could grant only compensatory damages against a master

In Zurich Insurance Co. v. Shearson Lehman Hutton, Inc., (66) the New York Court of Appeals addressed the problematic consequences of allowing insurance providers to indemnify companies for punitive damages incurred from the acts of their employees. (67) Thus, a director may not be indemnified by the corporate board for an award of punitive damages as a matter of public policy if the director acted in bad faith, notwithstanding sections 721 and 722 of the Business Corporation Law. (68)

VIII. AMOUNTS OF AWARDS

Historically, New York courts have held that punitive damages were not strictly quantifiable, but should bear a reasonable relation to the harm done. (69) Also, the fact-finder was permitted to consider the defendant's wealth when assessing a damage award. (70) Nevertheless, a fact-finder's discretion was not absolute and the court retained the power to...