In Bensalem Racing Ass’n, Inc. v. Ace Prop. and Cas. Ins. Co., a Pennsylvania court recently dealt with whether an insurer must provide coverage for punitive damages – even when the policy has no specific exclusion for such damages.

In the related underling case, Mario Calderon was killed after falling off of a horse that was spooked by a chicken on a Parx racetrack. Calderon’s estate sued  Parx, who held a commercial umbrella liability policy with Ace which did not contain a written exclusion for punitive damages. Despite the lack of an exclusion, Ace issued reservation of rights letter wherein Ace reserved ts right to disclaim coverage under the policy for any punitive damages that might be awarded in the underlying case.

At the end of the trial, the jury returned a verdict in favor of the Calderon and against Parx, but Ace declined to indemnify Parx for the punitive damage award. Parx filed post-trial motions which the court ultimately denied. The parties, including Ace, finally came to a settlement agreement, with Ace agreeing to tender payment for its share of compensatory and delay damages, but it did not make any payments toward the punitive damages component.

Parx commenced a breach of insurance contract and bad faith action against Ace seeking coverage for the punitive damages. The parties cross moved for summary judgment. Ace relied on Pennsylvania’s established rule that a claim for punitive damages against a tortfeasor, who is personally guilty of outrageous and wanton misconduct, is excluded from insurance coverage as a matter of law. The court explained that public policy does not allow a tortfeasor to shift burden of punitive damages to insurer, as punitive damages are not intended as compensation but instead are a penalty imposed to punish the defendant and deter him and others from similar conduct.

Parx tried to utilize a “vicarious liability” exception, claiming that the punitive damages award was based on vicarious liability in the underlying case. However, the court rejected this argument, explaining that Parx was undoubtedly directly liable in the underlying case based on their status as landowners of the racetrack.

The court reasoned that their decision was consistent with Pennsylvania law and public policy, and therefore, punitive damages based on Parx’s direct liability were not insured and not recoverable from Ace.

Thanks to Chelsea Rendelman for her contribution to this post and please write to Mike Bono for more information.