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Insurers generally claim that they can not or should not reimburse or insure the amount of punitive damages because it would defeat the criminal aspect of punitive damages. Insurance companies typically rely on "public order" in California and point to California Insurance Code section 533. Section 533 states:
An insurer is not liable for a loss caused by the insured's intentional act; but he is not relieved by the neglect of the negligence, or by the insured's agent or others.
The purpose of criminal damages is to punish wrongdoers and thus discourage them from committing wrongdoing. [ Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 pp. 2d 980, fn. 13 (Neal).] In Neal, the California Supreme Court set out three factors relevant to the assessment of criminal damages:
- the degree of reprehensibility of the act;
- the amount of compensatory damages granted; and
- the specific defendant's fortune.
The primary purpose of compensatory damages is fundamentally different from punitive damages – to make the plaintiff whole, not to deter future damages. There is simply no reason for punitive damages to be limited by any fixed relationship to actual damages. [ Lane v. Hughes Aircraft Co ., 93 Cal.Rptr. 2d 60, 22 Cal.4th 405, 993 P.2d 388 (Cal. 2000)]
I BMW of North America, Inc. v. Gore 517 U.S.C. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), the Supreme Court first announced three guiding principles for assessing the Constitution for punitive damages awards:
- the degree of reprehensibility of the defendant's conduct;
- the difference between the damage or potential damage suffered by the plaintiff and
- his penalty for damages; and the difference between this remedy and the civil penalties permitted or imposed in comparable cases.
BMW was the first time the court ever struck down a penalty amount that is constitutionally excessive; The court upheld BMW in questioning the amount of a penalty in Cooper Industries 532 U.S.C. at 440-43, 121 S.Ct. 1678 and followed BMW when he struck down another penalty in State Farm Mutual Insurance Co. v. Campbell 123 S.Ct. 1513, 1521-26, 155 L.Ed.2d 585 (2003) where the limited penalty amount to a small multiplier of compensation damages.
Insurance companies often cite Peterson v. Superior Court 31 Cal.3d 147 (1982), in support of their argument. The court in Peterson raised the issue of "inflicting punitive damages denies an insured's coverage for both compensatory damages and punitive damages." It stated that "compensation for the penalty damage is prohibited for general political reasons."
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to working as an insurance consultant specializing in insurance coverage, insurance claims handling, bad faith insurance and insurance fraud almost as much for insurers and policyholders.
He also acts as an arbitrator or mediator for insurance-related disputes. He practiced law in California for more than 44 years as an insurance and claims management attorney and more than 54 years in the insurance industry.
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He is available at http://www.zalma.com and email@example.com. Mr. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award. For the past 53 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their indemnity staff to become professionals in insurance claims.
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