In the last few decades, administrative regulation at both the federal and state levels has much more frequently than in the past deployed a distinctive weapon in its remedial arsenal: the imposition of a civil fine or penalty on actors who violate a regulatory dictate or prohibition. As the imposition of such civil fines and penalties (or “monetary sanctions”) has become more common, and as their magnitude increases, a new issue has begun to arise: whether, as a matter of public policy, insurance against liability for such monetary sanctions is permissible. Only a few jurisdictions have addressed the question thus far, and even these decisions do not have definitive breadth; they can easily be understood to leave a number of issues open. The subject therefore calls out for analysis.
To be clear, the issue is not whether or when liability insurance policy language, whatever it is, can properly be interpreted to provide coverage of liability for monetary sanctions. Rather, the issue is whether, if an insurance policy does provide such coverage, public policy permits it to do so. The issue concerns validity, not meaning. For example, most liability insurance policies insure against liability payable as “damages.” Whether monetary sanctions are or should be regarded as “damages” is an interesting and important question, but that question is outside the scope of this Article.
That is not the principal setting, however, in which the issue is likely to arise in the future. Some liability insurance policies are beginning to add insuring language that expressly covers civil liability for regulatory fines and penalties, often subject to the proviso that such liability is not uninsurable under the law of the jurisdiction pursuant to which the policy is construed. Policies that contain this or similar language both render the “damages” issue moot and expressly hinge their provision of coverage on the validity of doing so. They expressly raise for the courts the public-policy question that providing coverage without the proviso of insurability would inevitably pose. Perhaps insurers include the proviso in order to avoid the negative optics of purporting to provide coverage that violates public policy. Or perhaps policies that include an insurability proviso stand a better chance of securing the approval of state insurance commissioners than those that do not include it. Regardless, insurance policies that expressly cover civil fines and penalties, with or without the insurability proviso, move the issue from arguably hypothetical, rare, or obscure, to a clearly timely and important issue.
In the last few decades, administrative regulation at both the federal and state levels has much more frequently than in the past deployed a distinctive weapon in its remedial arsenal: the imposition of a civil fine or penalty on actors who violate a regulatory dictate or prohibition. As the imposition of such civil fines and penalties (or “monetary sanctions”) has become more common, and, as their magnitude increases, a new issue has begun to arise: whether, as a matter of public policy, insurance against liability for such monetary sanctions is permissible. Only a few jurisdictions have addressed the question at all thus far, and even these decisions do not have definitive breadth; they can easily be understood to leave a number of issues open.
As I will try to show, I doubt that many courts will rule that civil fines and penalties are insurable—full stop. Rather, I predict that one of the main questions that will arise is whether to approach the issue on a case-by-case basis, or to adopt a per se rule that liability for civil fines and penalties is uninsurable. The former contextual approach would take into account the nature of the violation generating the civil fine or penalty, and the applicable state’s existing law on analogous issues, mainly the insurability of liability for punitive damages. The per se approach would not take these factors into account. Given the analysis that follows, I think that the contextual approach would be far more sensible and in line with variations in the law across the states, though it is possible that some states will adopt the contextual approach and that others will adopt a per se rule.
To analyze the issue, this Article proceeds as follows. Part I characterizes the different sources of civil liability for regulatory fines and penalties. Part II develops the criteria that should be relevant to the insurability of such liability. Part III canvasses the sparse case law and statutory law that applies directly to the issue, and then examines the closest analogy to the issue—the insurability of liability for punitive damages—exploring the ways that different states, with different rules governing the insurability of punitive damages, could address the insurability of civil liability for monetary sanctions. Part IV analyzes the different litigation contexts in which the insurability issue may arise, including the collateral effects that settlement of claims for, and assessment of, monetary sanctions may have on policyholders’ coverage rights and insurers’ coverage defenses.
Hundreds, and perhaps thousands, of federal and state legal bases exist for the imposition of regulatory fines and penalties. Indeed, there are so many such varied sources that separating them into helpful categories is not possible. This is perhaps the main reason for my contention (and prediction) that a contextual approach to the insurability issue makes the most sense. A per se approach would ignore the wide variety of statutes and statutory purposes that could be involved. Because of this variation, instead of proposing a categorization, a brief summary of several of the major federal and state sources of authority can provide a useful sense of the field.
The authority for imposition of civil fines and penalties typically is embodied in a statute, delegating to an official or agency the authority to levy a fine or penalty. For example, in the environmental field, the Clean Air Act authorizes the Administrator of the Environmental Protection Agency (EPA) to issue orders imposing penalties of up to $25,000 per day for violation of certain provisions of the Act. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) authorizes actions for violation of certain orders, including fines of $25,000 for each day of violation.
Similarly, in the consumer protection field, the Federal Trade Commission (FTC) Act authorizes the imposition of penalties of up to $46,517 for engaging in certain unfair or deceptive trade practices. And the Consumer Product Safety Commission (CPSC) was originally authorized to impose civil penalties of up to $100,000 per violation and $15 million for any series of related violations, but both levels have periodically been adjusted upwards.
The Occupational Safety and Health Administration (OSHA), a regulatory agency of the U.S. Department of Labor, penalizes employers up to $15,625 per violation of federal working condition standards, or $15,625 per day if an employer fails to abate subpar conditions. For willful or repeated offenses, the penalties rise tenfold to a maximum of $159,259 per violation and a mandatory minimum penalty of $11,162 (subject to gradual reduction percentages for employers with 250 or fewer employees).
Some federal statutes employ scienter requirements that threaten heightened penalties for parties that willfully fail to remedy a known violation. For example, the FTC may seek an additional civil penalty of not more than $10,000 per violation against a party “with actual knowledge” of their engagement in certain unfair or deceptive trade practices. Similarly, the CPSC’s authorization to seek $100,000 per violation is reserved for “knowing” violations, which is statutorily defined as either subjective (“actual knowledge”) or objective (“knowledge deemed to be possessed by a reasonable man who acts in the circumstances”). OSHA may assess tenfold penalties against willful or repeat offenders.
State authority to levy fines or penalties for a variety of different statutory violations also abounds. For example, in the field of consumer protection, most states have enacted statutes prohibiting unfair, deceptive, and abusive practices or competition, often referred to as “UDAP” laws. Some states require a violation to be willful, while others do not. Penalties for violation vary widely, from $1000 to $50,000 per violation. And about half-a-dozen states have enacted data security statutes or regulations that require “reasonable” data security practices, with fines and penalties ranging from $1000 per violation to $500,000 in total. In the environmental area, a vast array of fines and penalties may be imposed for violation of state statutes and regulations. The same is true of other areas of concern, including health and safety regulation.
The principal factor governing public policy regarding the insurability of tort liability and other forms of liability risk has long been concern for “moral hazard”: the tendency of an insured party to exercise less care to avoid incurring an insured loss than would be exercised if the loss were not insured. As recently as the late nineteenth century, it was an open question whether, because of moral hazard, public policy permitted insurance against liability even for negligence. By the last decades of the nineteenth century, the courts in the states of the United States definitively rejected challenges based on alleged public policy in favor of the validity of liability insurance. The courts of the time occasionally were presented with the question whether it was still against public policy to insure against liability for intentionally caused loss, but the issue did not arise frequently, simply because most liability insurance policies precluded coverage of such liability, either with an express exclusion or by affording coverage only to liability arising out of “accident.” The courts clearly recognized that, although one of the purposes of imposing liability for negligence was to deter that form of conduct from occurring, the benefits of holding that insurance against liability for negligence was permissible were worth the possible loss of deterrence that such insurance might entail. It is also worth noting, however, that insurance against liability for what have been informally called “intentional torts” is not understood to violate public policy in the absence of an actual intent to cause loss. Thus, for example, in the United States, libel and slander are often classified as “intentional torts,” but insurance against liability for these torts does not violate public policy.
Only a few states have addressed the insurability of liability for civil fines and penalties. Case law in most states, however, addresses the analogous issue of whether the public policy concern about moral hazard does or does not permit insurance against liability for punitive damages. It turns out that the answer varies not only from state to state, but, in some states, from situation to situation. Consequently, I leave detailed discussion of this analogous setting to Part III.
The question then becomes: How should courts determine the strength of the public policy concern about moral hazard as it applies to the insurability of liability for civil fines and penalties? In effect, this decision involves weighing two public policies against each other: the public policy favoring freedom of contract, in this case, freedom to contract for liability insurance, and the public policy concerning insurance that excessively encourages moral hazard. It is ancient learning that “public policy is an unruly horse,” which the courts are loath to ride unless it is necessary. But that is merely a caution, not a prohibition. Of course, the insurability issue poses a question of state law, even when a federal fine or penalty has been levied. Still, certain general principles seem relevant to the question whether and when to mount the unruly horse.
Fines and penalties may serve a variety of purposes and therefore may occupy a variety of places within a regulatory scheme. Given the vast array of sources of authority for the imposition of fines and penalties, the nature of the particular regulatory scheme and the particular context in which a fine or penalty has been levied are likely to be of considerable significance. A per se rule that liability for civil fines or penalties is or is not insurable therefore would be insensitive to these varying contexts. The main possible purposes are likely to be punishment, deterrence, and counterbalancing private under-enforcement through the provision of administrative compensation.
When the primary purpose of a monetary sanction is punishment, insurability is most in question, because moral hazard is substantial. This is because the availability of insurance against the sanction is likely to blunt—though not necessarily eliminate—the effect of the punishment, since the insurer and not the defendant/policyholder will pay all or part of it. Determining whether punishment is the main purpose of a sanction may not always be easy. The context in which the legislation authorizing the sanction was enacted may shed light on the issue, as may express legislative history.
But even when the primary purpose of a sanction is punishment, the issue of insurability may still be contestable. Even if a monetary sanction is insurable and insured, the imposition of a sanction designed to punish may have adverse reputational effects despite the insurability of the sanction; future insurance premiums may increase if a fine or penalty is imposed; or future insurance may be more difficult or impossible to purchase. The prospect of these effects may reduce the moral hazard that would otherwise be associated with insurability.
In addition, the fact that the sanction is civil rather than criminal may have a bearing on the issue. Criminal fines and penalties are the classic example of monetary sanctions designed to punish. Certainly, a civil fine or penalty may be designed to be less punitive than a criminal sanction. Since it is always possible for the legislature adopting a regulatory regime to have included authority to impose criminal fines or penalties for a regulatory violation, there is an argument that use of a civil fine or penalty is designed to be less punitive than a criminal monetary sanction would be. The collateral consequences of committing a crime, including but not limited to adverse reputational consequences even for non-natural persons such as corporations, suggest that employment of civil sanctions alone reflects a less punitive purpose. Moreover, when a statute provides for the imposition of criminal and civil fines and penalties in the alternative, the inference that the purpose of a civil fine or penalty is to be less punitive is not only permissible, but arguably strong.
In contrast, when a statute provides only for the imposition of civil fines or penalties, whether and to what extent the purpose of such sanctions is punitive is less certain. A permissible inference is that the purpose of such fines or penalties is not to be punitive, or not to be as punitive as corresponding criminal sanctions would have been. But a different permissible inference is that the purpose of choosing civil rather than criminal sanctions is to facilitate enforcement, by avoiding the constitutional and other protections to which a defendant would be entitled if the sanctions were criminal, without any necessary implication that civil sanctions are not as punitive as criminal sanctions. All this depends on the nature of the statutory scheme in question, which course may vary from scheme to scheme.
Perhaps the most significant factor in determining whether monetary sanctions are designed mainly, or heavily, to punish is whether a sanction can be levied in the absence of some form of scienter. On the one hand, when there is what amounts to strict liability for a violation, punishment seems much less clearly to be a purpose of the statutory scheme than when intent to cause harm or knowledge that the statute is being violated is required. And when sanctions may be imposed for negligent violation, punishment also seems less likely to be a primary purpose. On the other hand, when the statute imposes higher sanctions when there was scienter, then the inference that punishment is a purpose when scienter is proved is likely to be more warranted.
An alternative or complementary purpose of monetary sanctions may be to deter violation of statutory standards. That is, a purpose of sanctions may be to promote compliance by threatening liability for non-compliance, rather than to punish non-compliance. Enforcement through the imposition of sanctions may be considered necessary or desirable because private enforcement is not possible or will be insufficient. For example, the “economic loss” rule in torts often precludes recovery of damages for pure economic loss. Sanctions for violation of statutes that result in such losses may therefore make up for this shortfall in deterrence. Similarly, even when in theory a private cause of action for damages resulting from a statutory violation is available—such as for causing pollution-related bodily injury—it may be difficult for any individual potential plaintiff to prove causation. Finally, violation may result in large numbers of individuals each suffering a loss too small to warrant bringing suit for damages, and aggregating devices such as class actions may not be available. When these considerations are all or part of the purpose underlying civil fines or penalties, permitting insurance against these monetary sanctions would be less likely to undermine their purpose.
For the same reasons that the threat of private lawsuits to recover damages may not sufficiently deter statutory violation, such lawsuits may not be brought to remedy all violations or may not result in recovery of all the damages caused by violation. Payment of monetary sanctions for violation may create a fund out of which governmental authorities can compensate those who have suffered harm as a result of violation, or to provide restitution of their losses.
It is no doubt awkward for courts to array statutory policies along a continuum from weak to strong, but the fact is that different statutes are addressed to problems that have different levels of salience and perceived severity. To use contemporary examples, the opioid crisis and (until recently) the COVID-19 pandemic are matters of high policy significance. Statutes addressing these problems and imposing monetary sanctions for violation may be understood to be at the forefront of legislative concern. Yet a statute imposing monetary sanctions for the failure to file commercial motor vehicle inspection certifications with the appropriate state agency (if such filing were required) would almost certainly have been enacted to address a problem of lower policy significance.
Standing alone, this factor may reflect the level of legislative concern that prompted the enactment of legislation, or the level of regulatory concern that triggered enforcement of a pre-existing legislative standard. This factor may also have an interaction with the purpose of the sanction in question, possibly helping to shed light on whether the main object of a sanction is punishment, deterrence, or compensation.
Monetary sanctions may be imposed only (a) for violations made with scienter, usually intent to harm or knowledge that an act or action constitutes wrongdoing; (b) for those violations committed with either scienter or negligence; or (c) regardless of scienter or negligence, that is, on a strict liability basis. It seems highly likely that these approaches reflect declining concern about the degree of blame associated with a violation. Although it is possible for a statute to impose monetary sanctions regardless of scienter or negligence because of the intention to ensure that all blameworthy violators are sanctioned, even when it would be difficult to prove their degree of blame, this kind of overbreadth seems unlikely. It seems more likely that a strict liability standard, for example, signals that a statute adopting such a standard is less concerned with the degree of blame attributable to violators and more concerned about achieving compliance with achieving the statute’s substantive goals.
By the same reasoning, for example, strict liability in tort is not generally understood to be imposed when there is special concern with assuring that all deliberate wrongdoing results in liability. Rather, just the opposite typically is true: strict liability is designed to create incentives to take care regardless of a potential violator’s state of mind. And imposing liability in tort for negligence typically is not understood to reflect an effort to ensure that those who have committed torts with scienter are held liable even when it is difficult to prove scienter. These standards typically are not deliberate “overkill” that tolerates false positives in order to minimize false negatives. On the contrary, the standards typically are adopted because they impose liability where it is considered appropriate and they refrain from imposing liability when it is not. For this reason, when monetary sanctions can be or are imposed without requiring scienter, or when sanctions are less severe when there is no evidence of scienter, the inference that the imposition of the sanction is more concerned with achieving compliance with the statutory standard, and less concerned with the degree of wrongdoing associated with violation, is likely to be reasonable.
It should be obvious from the foregoing discussion that there is a continuum along which the purposes of statutes that impose monetary sanctions can be arrayed, and that the place on the continuum at which a particular form of sanction falls has a bearing on insurability. At the negative end of the continuum lie the least insurable situations and sanctions, and at the positive end would lie the most insurable situations and sanctions. A statute that imposes sanctions in order to punish violators, addresses a matter of urgent concern, and requires scienter for violation is likely to be signaling that it addresses a public policy issue of great significance. Absent unusual circumstances, monetary sanctions imposed by such a statute would seem to lie toward the negative end of the continuum of insurability. However, sanctions whose purpose is to deter or compensate and address a matter that is not of heightened public concern and that can be imposed without a showing of scienter or negligence would seem to lie toward the positive end of that continuum. Statutes that are a mix of these factors would lie at different places on the continuum of insurability and, depending on their characteristics, would tend to lie closer to the middle than the negative and positive ends of that continuum.
A sanction’s place on the continuum would not necessarily be determinative of insurability. For some courts, even sanctions lying toward the negative end of the continuum sometimes would still be insurable, whereas for other courts they would not be. But other things being equal, the argument for insurability would gain strength to the extent that a sanction lay toward the positive end of the continuum.
There is case law in five states—though some of the decisions are in federal courts applying state law—that rules directly or can be read to have a direct bearing on the insurability of civil fines and penalties. And there are two states whose statutes may be read to address the issue to some extent. Reading these sources together, their tendency, such as it is, is toward ruling that civil fines and penalties are not insurable under all or some circumstances, but a number of the rulings are not conclusive.
Some case law can be regarded as relevant by analogy—mostly case law about the insurability of liability for punitive damages—but also other case law about the insurability of liability for “damages” under the federal Telephone Consumers Protection Act (TCPA). Both sources of analogous case law provide mixed messages.
The case law addressing the issue is thin and not reliably generalizable. One state, New Hampshire, has ruled that a civil penalty for breach of a nursing home’s fiduciary duty was insurable, at least when the violation was negligent, even if the purpose of the fine was “penal in nature.” This may appear to be a qualified ruling limited to these circumstances, but, given New Hampshire’s prior broad ruling that liability for punitive damages is insurable, which the court cited, the decision can be read as an unqualified endorsement of the insurability of civil monetary sanctions.
But case law in four states tends in the other direction. Both Kansas and New Jersey have ruled that penalties imposed for conduct related to drunk driving are uninsurable, using language broad enough to be applied to civil fines and penalties generally, though in neither state are there subsequent decisions doing so. A New York trial court has ruled fairly broadly that penalties for willful criminal misconduct are not insurable. And South Dakota has ruled that civil penalties imposed under the Clean Water Act for a knowing, conscious decision to construct a roadway without a federal permit were punitive and therefore uninsurable.
In addition, two states have enacted statutes that can be read to address the insurability issue. California’s statute clearly does so, though in limited fashion, providing that an insurance policy may not cover and may not be construed to cover fines and penalties imposed in actions brought under a certain portion of that state’s statutes. Many of that state’s statutes appear to lie outside the ambit of the statute’s prohibition. A North Dakota statute more generally provides that any contract that exempts anyone from responsibility for “fraud or willful injury to the person or property of another, or violation of law, whether willful or negligent,” is against public policy. Read literally, by its terms this statute would not only render civil fines and penalties uninsurable, but also would prohibit insurance against liability for negligent traffic violations causing bodily injury or property damage. The statute almost certainly is not intended to be this broad, so its actual scope is uncertain.
The case law and statutes just described provide limited guidance only. Other states considering the insurability issue would likely find these sources of authority of marginal relevance at most. It seems more likely that states would consult their own law on analogous issues, principally their own law governing the insurability of liability for punitive damages, in assessing the application of their own state’s public policy to the insurability of liability for civil fines and penalties.
In contrast to the sparse law directly governing the insurability of civil fines and penalties, a substantial body of case law addresses the insurability of liability for punitive damages. And some case law concerns the insurability of damages assessed under the TPCA. These are analogous subjects, because they reflect each state’s considered judgment about the relation between freedom to contract for insurance and the public policy concern about the moral hazard that insurance against the wrongs in question poses.
Interestingly, the punitive damages issue did not arise to a significant extent until recent decades. My explanation rests on the fact that punitive damages were rarely available outside of circumstances in which the defendant had intentionally caused the loss in question. Because coverage of liability for intentionally caused loss was already expressly excluded by most liability insurance policies, the issue was moot, and the public policy issue did not arise. With the expansion in the scope of tort liability that occurred in the United States beginning around 1960, however, two factors converged to undermine any notion that public policy automatically precluded insurance against liability for punitive damages. First, the degree of wrongdoing necessary to support an award of punitive damages was relaxed in some states. Second, suits seeking to impose liability for punitive damages often are brought against corporate defendants, either expressly grounded on the doctrine of respondeat superior, or even where the corporation is alleged to be liable in its own right, under circumstances where the corporation’s allegedly egregious conduct was actually the conduct of an employee or employees. The degree of wrongdoing attributable to the corporation itself in such situations may not always be great.
A division of authority regarding the insurability of liability for punitive damages then developed. As I indicate below, a substantial number of states hold that insurance against liability for punitive damages does not violate public policy. A few states hold, in what amount to per se rules, that insurance against liability for punitive damages violates public policy and is therefore uninsurable. In contrast to both of these bright-line approaches, other states have relaxed their restrictions (if any), in various ways, sometimes distinguishing between punitive damages awarded when the defendant’s conduct occurred with intent to cause harm, on the one hand, and circumstances in which there was no such intent, on the other hand. Other states have distinguished vicarious liability for punitive damages from direct liability, ruling that the former is insurable but that the latter or not, or is not necessarily, insurable. Additional distinctions are sometimes drawn. Thus, whether liability for punitive damages is insurable, and under what circumstances, varies from state to state and often depends on the circumstances. The upshot of all these developments is that any notion that there is a firm public policy against insurance of liability for punitive damages has broken down over time, as an increasing number of states have adopted liberal rules and relaxed restrictions that might have been supposed to apply.
In what follows, I provide examples of the different approaches that different states have taken. I do not provide what would purport to be a comprehensive catalogue of these approaches, for three reasons. First, compilations of the decisions in each state are widely available elsewhere. Second, the decisions often address the particular facts or particular wrongs committed or allegedly committed by the policyholder, without expressly stating the intended breadth of their holdings. The language addressing punitive damages may be general, but only when there is a subsequent case law, could we know for sure the exact scope of the holding. And there are few subsequent cases in most jurisdictions. Finally, there is little point, given the purposes of this Article, in attempting to cite and classify all the decisions in all the states. The punitive damages decisions are relevant to the insurability of civil fines and penalties only by analogy, and in any given state the courts are likely to attend mainly to their own case law on the insurability of liability for punitive damages, crediting it for what it is worth. The purpose of the following discussion is to provide a review of the overall landscape; although I reference the rough number of decisions that fall into each category, a precise head count is not important for present purposes.
In roughly one-third of the states, liability for punitive damages is insurable, essentially without qualification, though of course the holdings of the cases are dependent on their material facts. For example, in American Home Assurance Co. v. Fish, the Supreme Court of New Hampshire held that insurance against liability for punitive or exemplary damages arising out of the violation of certain federal civil rights statutes was insurable. Nothing in the opinion indicates that the holding was limited to these kinds of violations, and the court’s subsequent holding that liability for civil penalties is insurable, even when “penal,” seems to confirm this interpretation.
Similarly, in Brown v. Maxey, the Supreme Court of Wisconsin held that liability for punitive damages was insurable, broadly rejecting the defendant’s argument that public policy should preclude insurability, noting first that a relevant public policy favors freedom of contract, and then further reasoning:
Moreover, we are not convinced that allowing insurance coverage for punitive damages will totally alleviate the deterrent effect of such awards. For example, as a consequence of the punitive damage award, defendant Maxey’s insurance premiums may rise, he may find himself unable to obtain insurance coverage, the punitive damage award may exceed coverage, and his reputation in the community may be injured.
The other states that hold broadly in favor of the insurability of liability for punitive damages tend to deploy rationales that echo those in the New Hampshire and Wisconsin opinions. In these states, the argument for the insurability of liability for monetary sanctions would be strongest, given the analogy between punitive damages and fines and penalties.
About a dozen states take this position. This is obviously a major restriction on insurability, because a high percentage of cases in which punitive damages are awarded are likely to involve precisely this kind of wrongdoing. For example, in Kentucky, insurance against liability for punitive damages arising out of gross negligence, as distinguished from intentional wrongdoing, is not against public policy.
Nevada takes this position even more clearly, declaring by statute that “[a]n insurer may insure against legal liability for exemplary or punitive damages that do not arise from a wrongful act of the insured committed with the intent to cause injury to another.” Public policy in Virginia also precludes insuring against liability for punitive damages that arise out of the insured’s intentional wrongdoing or criminal misconduct. In states taking this position, the analogy to the limited insurability of liability for punitive damages would naturally lend itself to analysis of the insurability of liability for civil fines and penalties.
Several states permit insurance against liability for punitive damages when the liability in question is vicarious, rather than based on the insured’s own conduct. In Florida, for example, “public policy does not preclude insurance coverage of punitive damages when the insured himself is not personally at fault, but is merely vicariously liable for another’s wrong.” Similarly, in Indiana, liability for punitive damages is insurable if the liability is vicarious, but not if the liability results from an insured’s own wrongdoing.
I suspect that this rule governing punitive damages would less frequently be applicable to the insurability of liability for civil fines and penalties, because the violation of a regulatory statute would most often have been committed by the policyholder rather than by a single employee or group of employees, whether or not, technically, the fine or penalty was imposed directly on the policyholder or on a vicarious liability basis.
Several states have ruled that liability for punitive damages either is clearly uninsurable, or state law strongly implies that this is the case. Arguably these include New York, Nebraska, Rhode Island, and Utah. In these states, the analogy to punitive damages would undermine the argument for the insurability of liability for civil fines and penalties, although the analogy would arguably be inapplicable to strict liability violations.
In two states there is no law specifically governing the insurability of liability for punitive damages. These include Michigan and (as nearly as I can tell) South Dakota.
The TCPA creates a private cause of action for “damages” for the greater of $500 per violation or a private party’s “actual monetary” loss, resulting from violation of the Act’s prohibition on robocalls. About a dozen states have ruled on the insurability of liability for these damages. There is a split of authority, with the decisions often turning on whether damages available under the Act are interpreted to be “penal” or “remedial.” States taking the former position tend to rule against insurability, and states taking the latter position tend to rule in favor of insurability.
None of the five judicial decisions relevant to the insurability of civil fines and penalties is definitive. The New Hampshire rule favoring insurability is long-established but rarely applied. And I would not bet a lot that all four of the states that I have described as tending toward uninsurability would rule squarely against insurability across-the-board if they were asked to do so. Nor would I bet a lot the other way. And the results might vary depending on the facts, for the reasons I enumerated in developing the insurability continuum that I described in Part II. Similarly, the California statute is definitive, but limited in its scope of application. And the North Dakota statute is so broad that its actual, intended scope is highly uncertain.
As for the analogous areas of punitive damages and TCPA liability, the results are also mixed. One-third of the states hold that punitive damages are insurable, and another substantial group holds that punitive damages are insurable either when liability is vicarious, or when the defendant did not intend harm or engage in conscious wrongdoing. A few states have blanket rulings that liability for punitive damages is uninsurable. And the case law on the insurability of TPCA damages is split.
In short, we can glean a bit from the law of the seven states that have in some manner addressed the insurability of civil fines and penalties, but only a bit. The law of even these states is not definitive, and other states would not necessarily follow them anyway. The analogous areas of punitive damages and TPCA liability send similarly mixed messages, strongly implying that, among other things, the outcome will be very heavily dependent on which state’s law applies, along with the facts from the case.
It is one thing to address the merits of the insurability issue. It is quite another to envision the settings in which the issue may be raised, for this may influence outcomes in subtle and not-so-subtle ways. Typically, regulatory authorities allege that an individual or (more frequently) an entity has committed a statutory violation and is liable to pay a civil fine or penalty as a result. The defendant/policyholder then eventually settles by paying a fine or penalty, among other things, or the allegations are litigated, whether in a court or in an administrative proceeding.
In view of these possibilities, the issue of insurability may be raised in a number of different ways. First, the policyholder may have settled with a regulator and paid a fine or penalty. If the applicable statute requires some form of scienter or conscious wrongdoing, the liability insurer is likely to take the position that this precludes insurance coverage as a matter of public policy. In response, the policyholder will argue that public policy does not preclude coverage even with scienter or wrongdoing. The policyholder also will argue that, in any event, the settlement does not collaterally estop the policyholder from arguing in the coverage case that it had no scienter and did not engage in conscious wrongdoing. Where and if settling in this situation is the legal equivalent to pleading guilty to a criminal offense, then, under the majority view, the policyholder is likely to be collaterally estopped on the issue of scienter or conscious wrongdoing. But if (as it will be in most cases) the settlement is merely a settlement and the not the legal equivalent, under the applicable statute, of pleading guilty to a criminal offense, then both the policyholder and the insurer are free to litigate the issue de novo.
On the other hand, if there was a settlement and the applicable statute does not require scienter or conscious wrongdoing, the policyholder will be free to argue that public policy does not preclude coverage because the payment of a fine or penalty was not necessarily under the conditions with which public policy would be concerned. Similarly, the insurer would be entitled to litigate de novo the question whether the policyholder acted with an intent to cause harm that would preclude coverage under the policy or under conditions that would violate any public policy that would preclude coverage when there was such scienter or conscious wrongdoing.
The other possible scenario would involve an actual judicial or administrative proceeding culminating in a judgment, or the administrative equivalent. If no civil fine or penalty is assessed, then, of course, there would be no coverage issue, unless the insurance policy in question covered defense costs. Whether defense costs would be covered would depend on whether the fine or penalty would have been covered if it had been imposed. This issue would be identical to the issue that would be posed if a fine or penalty were imposed. In the subsequent coverage case, if the insurer had defended in the underlying action, then the policyholder would ordinarily be potentially subject to collaterally estoppel as to any relevant and applicable findings of scienter or conscious wrongdoing entered in the underlying fine or penalty proceeding. The policyholder would therefore have to argue that, nothwithstanding these findings, neither the policy language nor public policy precludes coverage under the circumstances. In contrast, regardless of the findings in the underlying proceeding, under the majority rule the insurer, not being in privity with the policyholder even if it had been defending, would be free to prove that the policyholder acted with scienter or conscious wrongdoing such that the policy language or public policy precluded coverage.
For these reasons and given the complexity of the collateral estoppel issues that may arise, a policyholder faced with the possibility of paying a civil fine or penalty would be well-advised, before doing so, to look at the law of the state or states likely to govern its coverage rights and to consider the potential collateral estoppel impact on its right to claim coverage of the possible settlement or judgment in question. Liability insurers are likely to have less control than policyholders over how to posture the underlying case, either because they will not be involved in the case at all, or because they will be defending subject to a reservation of rights and precluded from acting on any conflict of interest that arises from their involvement. But being aware of the implications for coverage of what happens in the underlying case will nonetheless be advisable.
The insurability of liability for what I have called “monetary sanctions”—civil fines and penalties—is an issue that is likely to arise with increasing frequency in the future. Little directly applicable law addresses the issue, and even this law provides limited guidance. There is considerably more case law about the analogous issues of liability for punitive damages and TPCA liability, but significant divisions of authority exist within both bodies of law.
Moreover, because the insurability issue is a question of state law, and because the numerous sources of authority for the imposition of civil fines and penalties vary considerably in their purposes and in the strength of those purposes, per se rules about insurability are unlikely to be well-suited to the task of applying public policy to the different settings and problems that are involved when monetary sanctions are imposed. Though adopting per se rules about the issue may be attractive to courts seeking to render adjudication of the issue efficient, sensitivity to variations in context often will argue against the per se approach. The courts are likely to have no alternative to the careful application of their own state’s public policy to the issue, on a statute-by-statute, case-by-case basis, cumbersome and time-intensive as that task may prove to be. In the meantime, the answer to the question, “Is liability for civil fines and penalties insurable?” is almost certainly that it is going to depend on the state whose law applies to the issue, the statute under which the fine or penalty is assessed, and the facts and circumstances in question.
