The answer is maybe, under some circumstances.  Unfortunately for the major accounting firm BDO Seidman, however, such circumstances didn’t exist in a recent New York coverage decision.  You can read the full opinion by clicking here.

BDO’s coverage dispute stemmed from a $92 million Florida jury verdict against BDO (ouch), which included $55 million in punitive damages.  The jury found that BDO had prepared fraudulent audits of a failing retirement home that went bankrupt.  The estate of philanthropist George Batchelor sued BDO and Deloitte Touche, saying it relied on the fraudulent audits when investing in a company that acquired, financed and managed assisted living residences.

The carriers disclaimed coverage for the punitive damages award under BDO’s professional indemnity insurance, which contained an exclusion for punitive damages reading as follows:

“This policy excludes…to the extent it is uninsurable by law…any claim for claims for fines, penalties, punitive or exemplary damages imposed by a judgement [sic] or any other final adjudication.”  (Note that, under this exclusion, coverage for punitive damages is precluded only if such coverage is prohibited by law.  Be sure to review exclusions carefully before concluding that there’s no coverage.)

When BDO refused to acknowledge that punitive damages were not covered under the policy, the carriers brought a declaratory judgment action in New York, and then sought summary judgment.

BDO opposed the summary judgment motion by arguing that the coverage case should be put off until an appeal in the underlying case was decided.  The Court refused to delay a ruling, writing:  “[BDO] has presented no reason for this court to question the regularity of the Florida proceedings or the legitimacy of the Florida judgment awarding punitive damages.”

As to coverage for the punitive damages award, the Court wrote:  “The purpose of punitive damages is…to punish conduct having a high degree of moral culpability and to serve as a warning to others in the future… Insurance coverage for the punitive damages in the Batchelor Action would be contrary to public policy.”

In New Jersey, directly assessed punitive damages likewise are not insurable as a matter of public policy.  There’s a question, however, as to whether vicariously assessed punitive damages can be covered.  In Malanga v. Mfrs. Cas. Ins. Co., 146 A.2d 105, 28 N.J. 220 (1958), for example, a jury returned a verdict for compensatory and punitive damages against a partnership and an individual partner, Malanga.   The Court held that the partnership was covered for punitive damages as long as the acts were not authorized by the partnership.  (The case had a Sopranos flair to it.  The partnership was a contracting company engaged in an earth-moving project.  A neighbor refused to allow Malanga onto his property to perform work.  Malanga then did the only sensible thing, running the neighbor over with a bulldozer.)

Specifically, the Malanga Court wrote:  “Since it cannot be said that the assault and battery was committed by, or at the direction of, the insured partnership, there is no reason to deny it the indemnity which it has purchased.  If the defendant intended to exclude the partnership from coverage for liability resulting from an assault by one of its members, it should have made that intention known.”

Absent a clear and specific exclusion for punitive damages, then, don’t assume that a punitive damages award isn’t covered.  It’s important (as always) to examine the policy and the underlying facts very carefully.   

By the way, the Chicago-based law firm of McCullough, Campbell & Lane, LLP, which represents insurance companies, maintains an excellent 50-state survey of this issue on its website.  You can see the survey by clicking here.