Companies are punished with monetary damages, but who's out the dollars?

In November 2018, an Oklahoma jury returned a $25.5 million verdict against Aetna for improperly denying coverage for proton beam therapy, a treatment the company considered experimental. Evidence adduced at trial showed that no one in the oncology community considered that treatment experimental for the treatment of cancer and that the treatment, in fact, would have been covered by Medicare, had the plaintiff been aged 65 or over. It might even have been covered by Aetna if the plaintiff had been younger than 21, but she was not in this case.

In the largest verdict for bad faith in U.S. history, the jury found that Aetna "recklessly disregarded its duty to deal fairly and act in good faith" and awarded punitive damages. During the course of deliberations, the jury specifically discussed "sending a message" to Aetna and "making a statement" so Aetna would reevaluate how it handles appeals and requests for coverage.

But will Aetna get the message? The answer to that question may turn on something completely unrelated to the case or the jury's intent: whether punitive damages are insurable by law. If so, Aetna will not be the one paying the punitives; its insurer will.

Whether punitive damages are insurable by law varies from state to state. Approximately 23 states generally permit punitives to be insured. Three states appear to prohibit insurability. The remaining states vary and often depend on whether the punitive damages were directly or vicariously assessed against a tortfeasor. Approximately 20 states appear to prohibit the insurability of directly assessed punitives as being against public policy, since such coverage would tend to frustrate the purpose of a punitive damage award in punishing a defendant for his own egregious conduct. Connecticut is one of those states; Tedesco v. Maryland Casualty, 127 Conn. 533 (1941); although punitives here are limited to an award of attorney fees in any event.

In states where punitives are not insurable, corporations with facilities, employees or legal activity in-state are increasingly turning to products sold by non-admitted and offshore insurers that specifically provide coverage for punitive damages and are beyond the reach of state regulators. Such policies might include language that expressly covers punitive damage awards plus choice of law clauses to interpret policies under law from jurisdictions that do permit insurability of punitives. Other policies from offshore markets might provide separate, standalone coverage of punitives that are only triggered in the event of a final judgment in a jurisdiction that prohibits insurability of punitives. Such policies insulate the corporation from the consequences of its bad conduct, making an award of punitive damages likely to punish only the insurer that sold the policy.

So what can a jury seeking to send a message and force a company to change its conduct do? If it's relying on punitives alone, not much. But perhaps jurors might start to proscribe the conduct at issue to effect the change they seek. Or perhaps insurance regulators or the courts might look at whether the relevant choice of law clauses themselves might be unenforceable as against public policy. Either way, it seems clear that punitive damages aren't what they were supposed to be.