April 24, 2009

Op-Ed Contends That Punitive Damages Are Insurable In California

Attorney Kirk Pasich has an op-ed in the Los Angeles Daily Journal (subscription required) arguing that, under California law, insurers may be obligated to indemnify their policyholders for punitive damages awards. While Mr. Pasich certainly deserves points for creativity, his argument runs afoul of settled California law.

California Insurance Code section 533 states that an insurer is not liable for the willful acts of its insured. The California Supreme Court, interpreting section 533, has unequivocally held that indemnification of punitive damages "is disallowed for public policy reasons." (Peterson v. Superior Court (1982) 31 Cal.3d 147, 159.) The Supreme Court has never overruled or even questioned its decision in Peterson, which is binding in all California courts.

Despite the clear rule established in Peterson, Mr. Pasich argues that California law is unsettled. He relies on other cases applying section 533 outside the punitive damages context. He notes that, in those cases, courts have held that section 533 does not bar a corporate defendant's claim for indemnification from an insurer where the corporate defendant is held vicariously liable for compensatory damages arising from the wilful or intentional acts of its employee or agent, except that it does bar indemnification by the insurer where corporate management authorized or ratified the employee's intentional acts. Relying on these cases, Mr. Pasich contends that a corporate insured may be entitled to insurance coverage for punitive damages, so long as the corporation's management has not authorized or ratified the conduct that gave rise to the punitive damages.

Regular readers of this blog can probably spot the flaw in Mr. Pasich's reasoning already: under California law, punitive damages cannot be awarded against a corporation unless corporate management authorized or ratified the wrongful conduct. (See Civil Code section 3294, subdivision (b).) Thus, the scenario in which Mr. Pasich says indemnity would be available - - an award against a corporate employer without a finding of authorization or ratification by corporate management - - simply cannot occur under California law. (See Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128, 1154-1155 [noting that Civil Code section 3294(b) "does not authorize an award of punitive damages against an employer for the employee's wrongful conduct. It authorizes an award of punitive damages against an employer for the employer's own wrongful conduct"].)

Mr. Pasich's opinion notwithstanding, corporations in California should not expect indemnity for punitive damages awards unless the California Supreme Court overrules its opinion in Peterson.