The Insurability of Punitive Damages in Washington: Should Insureds Who Engage in Intentional Misconduct Reap the Benefit of Their "bargains?"

• Publication year: 2002
• Citation: Vol. 26 No. 02

SEATTLE UNIVERSITY LAW REVIEWVolume 26, No. 3WINTER 2003

NOTES

The Insurability of Punitive Damages in Washington: Should Insureds Who Engage in Intentional Misconduct Reap the Benefit of Their "Bargains?"

Stephanie L. Grassia(fn*)

Introduction

Did the Washington Supreme Court make the right decision when it recently held that intentional wrongdoers, who are assessed a penalty of punitive damages, may shirk their responsibility by passing the cost of those damages on to the insurance-buying public via its insurers? This issue was of such significance that amicus curiae briefs were submitted by several large insurance companies and Washington corporations, including American International Companies (AIG), American Insurers, State Farm, Lloyd's of London, Costco Wholesale Corporation, Puget Sound Energy, Weyerhaeuser, as well as the Washington State Trial Lawyers Association Foundation. After examining the moral and pragmatic ramifications of this decision, one must conclude that the court erred.

Consider the following scenario: a Washington company, Fluke, desires to put its California competitor, Talon, out of business. Fluke devises a plan to sue Talon for patent infringement. Unfortunately for Fluke, the case goes to trial, and the jury finds that Fluke had no basis for bringing the suit and that Fluke's ulterior motive was to remove its competitor from the marketplace.

Taking great exception to being wrongfully sued, Talon retaliates by initiating a lawsuit against Fluke in California State court, alleging that Fluke maliciously prosecuted the patent infringement claim in an attempt to force Talon out of business. Fluke tenders the claim to its liability insurer, which notifies Fluke that California law does not allow insurance coverage for punitive damages. Fearing a lack of coverage, Fluke initiates a declaratory action against its insurance company in Washington.

In the meantime, a California jury finds in favor of Talon and awards two million dollars in compensatory damages and four million dollars in punitive damages. Both Fluke and Talon then move for summary judgment in the declaratory action.

Applying Washington law, the Superior Court construes the insurance policy's insuring clause as providing coverage for compensatory damages but not for punitive damages. Fluke appeals, and the Washington Court of Appeals agrees with the Superior Court that Washington law applies to this action, upholding the ruling on compensatory damages. However, and more importantly, the appellate court disagrees with the trial court on the issue of punitive damages, finding that it is not against public policy to insure punitive damages in Washington.

Of course, this narrative is too fact-specific to be a hypothetical. Indeed, the precise scenario described above actually unfolded in Washington recently in Fluke Corp. v. Hartford Accident and Indemnity Company.(fn1) Hartford filed a petition for review with the Washington Supreme Court, which was granted.(fn2) The Washington Supreme Court heard oral arguments on September 11, 2001, and on November 21, 2001, it affirmed the Court of Appeals on all issues.(fn3) As a result, punitive damages are now considered to be insurable in Washington State.

This Note examines the issue of the insurability of punitive damages, concluding that insurance coverage should not be allowed for punitive damages arising from intentional misconduct because such coverage contravenes public policy in the state of Washington. Part I defines and provides background for punitive damages and malicious prosecution. Part II outlines and synthesizes the treatment of the insurability of punitive damages in various states. The facts of the Fluke case, including the Court of Appeals's rationale that insurance coverage for punitive damages is not against public policy in Washington, are detailed in Part III. The next section reveals the Court of Appeal's faulty reasoning, illuminating several reasons why Washington should prohibit insurance coverage for punitive damages arising out of intentional misconduct. Part V summarizes the Washington Supreme Court's decision affirming the appellate court on the issue of whether insuring punitive damages is against public policy in Washington. This Note concludes in Part VI that punitive damages assessed for intentional misconduct should not be insurable in Washington as a matter of public policy and that the Washington Supreme Court should have reversed the appellate court on this issue.

I. History and Background of Punitive Damages and Malicious Prosecution

A. Punitive Damages

When suing in tort, plaintiffs may be awarded punitive damages in addition to and apart from compensatory damages.(fn4) Punitive damages (also called exemplary damages, punitory damages, or vindictive damages(fn5)) are awarded not to compensate the plaintiff but to punish and deter defendants (and potentially others) from such conduct in the future.(fn6) "Punitive damages 'are not compensation for injury. Instead, they are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence.'"(fn7)

Punitive damages have existed in America since the late 1700s and have "received widespread and substantial acceptance."(fn8) To illustrate this longstanding principle one need look no further than Day v. Woodworth, (fn9) in which the United States Supreme Court stated the following: [i]t is a well-established principle of the common law, that in actions of trespass and all actions on the case for torts, a jury may inflict what are called exemplary, punitive, or vindictive damages upon a defendant, having in view the enormity of his offence rather than the measure of compensation to the plaintiff. We are aware that the propriety of this doctrine has been questioned by some writers; but if repeated judicial decisions for more than a century are to be received as the best exposition of what the law is, the question will not admit of argument.(fn10)

Washington is one of only five states that disallows juries from awarding punitive damages in the first place because they are contrary to public policy.(fn11) It is important to note, however, that punitive damages may be awarded in Washington when assessed under the law of another state, under federal law,(fn12) or where expressly authorized by statute.(fn13) For example, punitive damages are expressly authorized under California law where Talon sued Fluke for malicious prosecution.(fn14) Importantly, Fluke is the first case in which the insurability of punitive damages has been addressed in Washington.(fn15) Prior to Fluke, Washington was one of seven states that was undecided on the issue.(fn16)

B. Malicious Prosecution

Fluke was sued for malicious prosecution in the instant case.(fn17) Malicious prosecution at common law involved the institution of a criminal or civil proceeding for an improper purpose and without probable cause.(fn18) Once a wrongful prosecution has ended in the defendant's favor, he or she may sue for tort damages.(fn19) To establish a cause of action for malicious prosecution in California, a plaintiff must demonstrate that the prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in plaintiffs favor; (2) was brought without probable cause; and (3) was initiated with malice.(fn20) Although malicious prosecution originated as a remedy for individuals subjected to maliciously instituted criminal charges, the tort has been extended in most common law jurisdictions to afford a remedy for the malicious prosecution of civil actions as well.(fn21)

Absent a specific exclusion, most commercial general liability policies provide coverage for malicious prosecution under the "Personal Injury" portion of said policies.(fn22) Additionally, most commercial general liability policies are construed to provide coverage for punitive damages.(fn23) Nevertheless, it is well settled that agreements or contracts against public policy are illegal and void.(fn24) "[Fjreedom of contract is subject to the limitation that the agreement must not be against public policy."(fn25) From these facts, the debate ensues: even though an insurance policy might be construed to provide coverage for punitive damages arising from malicious prosecution or other intentional torts, should public policy concerns override the insurance policy and preclude coverage?

The Washington Supreme Court has now weighed in on this issue; however, a tension remains. This tension arises from the conflict between parties' freedom of contract on one hand versus a public policy judgment on the other hand that parties should not be allowed to insure against intentional wrongdoing.

II. Treatment of the Insurability of Punitive Damages in Other States

An analysis of other states' treatment of the insurability of punitive damages helps put the issue in perspective. According to authoritative reports, twenty-seven states (including Washington) permit liability insurance coverage for punitive damages as a matter of public policy, eighteen states disallow such coverage, and six states are undecided.(fn26) However, of the twenty-seven states that permit coverage for punitive damages, nearly thirty percent of them make an exception for punitive damages assessed for intentional misconduct.(fn27)

Additionally, more...