Punitive Damages are Not Insurable? Welcome to Fabulous Las Vegas!

Punitive Damages are Not Insurable? Welcome to Fabulous Las Vegas!

When a client asks “if we get hit for punitive damages, will my insurance cover it?” it’s tempting to offer the knee jerk response, “There is no insurance coverage for punitive damages.  It would violate public policy to do otherwise.”  But in Nevada, the correct answer is “It depends.”  Leave it to Las Vegas!

When Can Punitive Damages be Awarded in Nevada?

The standard of proof for entitlement to punitive damages in Nevada is when it is proven by clear and convincing evidence that the defendant’s conduct constitutes oppression, fraud or malice. NRS§ 42.005(1) (2010).

Under Nevada law, an employer is not liable for exemplary or punitive damages arising from an employee’s misconduct unless:

  1. The employer had advance knowledge that the employee was unfit for the purposes of the employment and employed the employee with a conscious disregard of the rights or safety of others;
  2. The employer expressly authorized or ratified the wrongful act of the employee for which the damages are awarded; or
  3. The employer is personally guilty of oppression, fraud or malice, express or implied. NRS § 42.007(1).

Moreover, if the employer is a corporation, the employer is not liable for exemplary or punitive damages unless one or more of the elements specified above are met by an officer, director or managing agent of the corporation who was expressly authorized to direct or ratify the employee’s conduct on behalf of the corporation.

Nevada Limits Punitive Damages in a Variety of Ways

NRS § 42.005 provides that an award of exemplary or punitive damages may not exceed (1) three times the amount of compensatory damages awarded to the plaintiff if the amount of compensatory damages is $100,000 or more, or (2) $300,000 if the amount of compensatory damages awarded to the plaintiff is less than $100,000. These limitations, however, do not apply to an action brought against:

  1. A manufacturer, distributor or seller of a defective product
  2. An insurer who acts in bad faith regarding its obligations to provide insurance coverage
  3. A person for violating a state or federal law prohibiting discriminatory housing practices, if the law provides for a remedy of exemplary or punitive damages in excess of the limitations prescribed in subsection 1 (of § 42.005)
  4. A person for damages or an injury caused by the emission, disposal or spilling of a toxic, radioactive or hazardous material or waste
  5. A person for defamation.

Punitive Damages Can Be Insurable

Insurability for punitive damage awards is governed by NRS 681A.095 (added in 1995; updated in 2011).  It states an 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.

The most common scenario is in cases of vicarious liability or respondeat superior.  Let’s say the insured is a trucking company and one of its drivers is cited for DUI.  In Nevada, a DUI conviction is automatic grounds for seeking punitive damages.  In this scenario, the insured trucking company most likely was unaware one of its drivers stopped off in Las Vegas for a break and had one too many at the Double Down Saloon.

The first step in the analysis of whether the likely imposition of punitive damages will be covered is to look at the language in the policy.  Some policies expressly exclude coverage for punitive damages, while other policies are silent.   If there is no express exclusion for coverage of punitive damage awards, courts will look to other coverage provisions.  If the policy defines “loss” as “those sums actually paid as judgments or settlements,” courts will often rule this language includes awards of punitive damages.

The next analysis will typically be whether the award was assessed based on direct versus vicarious liability.  This is where the public policy arguments come in: was the act in question the type of wrongful act punitive damages were intended to prevent or deter?

In our trucker example, much will hinge on whether the employer knew or should have known the company had drivers on the road who it knew frequently stopped off in Las Vegas for more than a try at keno. Assuming a managing agent of the employer had no prior knowledge of its employees’ propensity to consume alcohol on road trips, the public policy argument holds little sway. After all, it is the employer, not the employee, who has been assessed with a punitive damage award because the employer is the insured.

The Takeaway? Call Tyson & Mendes!

So when the question arises in Nevada, the best advice is to call one of us in the Las Vegas office of Tyson & Mendes where we can evaluate all the facts and apply the sometimes convoluted Nevada law to the case.

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