The Office of General Counsel issued the following opinion on December 21, 2005, representing the position of the New York State Insurance Department.
Re: Reinsurance of Punitive Damage Coverage
May a New York authorized insurer reinsure an insurer not authorized in New York, on either a facultative or treaty basis, where the reinsured general liability insurance policy provides punitive damage coverage on New York risks and the policy is issued and delivered in a jurisdiction that permits punitive damages to be insured?
Assuming that the transaction is not implemented in a manner that violates New York law or evades the public policy concerns of the State, and the underlying insured has no cut-through or other right to collect directly from the reinsurer, the New York reinsurer may reinsure the ceding insurer for its obligations under an insurance policy providing punitive damage coverage where the policy is issued and delivered in a jurisdiction that permits punitive damages to be insured even though the policy provides coverage for New York risks.
No specific facts are supplied. The inquirer asks a general question regarding whether a New York reinsurer may reinsure a ceding insurer for its obligations under an insurance policy providing punitive damage coverage with respect to New York risks where the policy is issued and delivered in a jurisdiction that permits punitive damages to be insured.
For the purposes of this opinion, it is assumed that the reinsurance agreements are within the permissible scope of the reinsurers licensing authority.
The general rule in New York is that the public policy of the state precludes insurance indemnification for punitive damage awards, whether the punitive damages are based on intentional actions or actions which, while not intentional, amount to "gross negligence, recklessness, or wantonness" or "conscious disregard of the rights of others or for conduct so reckless as to amount to such disregard". Home Ins. Co. v. American Home Products Corp., 75 N.Y.2d 196, 200, 550 N.E.2d 930; 551 N.Y.S.2d 481 (1990); Public Service Mutual Insurance Company v. Goldfarb, 53 N.Y.2d 392; 425 N.E.2d 810; 442 N.Y.S.2d 422 1981); Hartford Accident. & Indem. Co. v Village of Hempstead, 48 NY2d 218, 228-229, 397 N.E.2d 737; 422 N.Y.S.2d 47 (1979). In Home Ins., which applied the rule to punitive damages recovered in an out-of-state judgment, the court stated:
The main argument against coverage, we noted, is that to allow it would defeat "the purpose of punitive damages, which is to punish and to deter others from acting similarly, and that allowing coverage serves no useful purpose since such damages are a windfall for the plaintiff who, by hypothesis, has been made whole by the award of compensatory damages. Home Ins. Co. at p. 200:
In Home Ins., the public policy of the judgment state, like that of New York, precluded indemnification for punitive damages. In Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309; 642 N.E.2d 1065; 618 N.Y.S.2d 609 (1994), the two judgment states permitted indemnification. The court concluded that New York choice of law principles required application of New York's public policy but that indemnification was precluded by New York policy only when the damage award was of a "punitive nature". The court concluded that where the damages that are awarded also had a compensatory purpose, the insurer had to indemnify its insured for them. See also Biondi v. Beekman Hill House Apt. Corp., 94 N.Y.2d 659, 731 N.E.2d 577; 709 N.Y.S.2d 861 (2000).
Neither of the two arguments against providing coverage for punitive damages appears to apply where a reinsurer provides reinsurance to an insurer that insures punitive damages in a state where such coverage is permitted. There is no reason to punish the insurer since the insurer is not the wrongdoer. Nor would the insurer be receiving a windfall since the reinsurance covers the actual obligations of the insurer. The reinsurance contract is a separate and distinct contract between the reinsurer and the ceding insurer, in which the reinsurer agrees to indemnify the ceding insurer against losses arising under an insurance policy lawfully issued by the ceding insurer. Accordingly, the Department, absent a decision by the courts to the contrary, has no objection to a New York authorized reinsurer assuming reinsurance covering punitive damage coverage from a non-New York authorized insurer where the policy is issued and delivered in a jurisdiction that permits punitive damages to be insured, subject to the caveats below.
It should be emphasized that this opinion does not apply to extra-contractual obligations, under which a reinsurer provides coverage to a ceding insurer for the ceding insurers liabilities arising from its handling of a claim under the underlying policy, including, but not limited to, liabilities arising from the failure of the ceding insurer to settle claims with in the policy limits, and alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action. As previously enunciated in our November 18, 2002 and earlier opinions, an insurer may not provide extra-contractual coverage for fraud, bad faith and punitive damages in New York.
Moreover, there are a few caveats that must be noted. First, the reinsurer may not assume any obligation directly to the underlying insured, through a cut-through or other method because such an obligation would be contrary to the public policy of New York as expressed by the courts. Further, the transaction may not be implemented in a manner that would violate New York law or is intended to evade the public policy concerns of the State. For example, in the inquirers original proposal, one of the scenarios involved a New York insurer insuring the policyholder under a general liability policy that contained an exclusion for punitive damages and, in conjunction with the policy, the New York insurers unauthorized affiliate would issue a separate policy outside New York that specifically covered punitive damages arising in New York against the policyholder; and the reinsurer, under a single policy would assume the obligations from both the New York and the non-New York insurer. Under such circumstances, it would appear likely that there would be violations of N.Y. Ins. Law § 1102(a) (McKinney Supp. 2005) and N.Y. Ins. Law § 2117(a) (McKinney Supp. 2005) and that the parties would be seeking to evade New York law.
For further information please contact Principal Attorney Paul A. Zuckerman at the New York City Office.