Since the recent $120 million jury award in California against Aetna U.S. Healthcare, I have gotten a number of calls from insurance brokers working with HMOs, asking, "Do I have coverage for these types of claims? If not, can I get it?"
What they want is protection against punitive damages but, unfortunately, there is no simple answer to their questions.
Aetna U.S. Healthcare, in fact, is suing six of its liability insurers just to find out who pays what. There's a lot at stake: more than $76 million in coverage, by some estimates.
Although punitive damage awards are relatively rare (less than 6 percent of winning plaintiffs get punitive damage awards according to recent U.S. Department of Justice statistics), most punitive damage verdicts soar to the level of millions of dollars -- large multiples of the amount of the actual or compensatory damages.
Punitive damages is the money usually awarded by a jury that is above the amount required to compensate an injured party, and is intended to punish or deter any such further behavior. These damages are usually imposed when the defendant's conduct was determined to be intentional, malicious, or willful, or demonstrated a conscious or reckless disregard of others. In other words, the conduct at issue must be more than merely negligent.
Since the purpose of insurance is to provide coverage for unintentional mistakes, inadvertent errors, or unforeseeable occurrences, punitive damages are generally specifically excluded by insurance policies.
But if they are not specifically excluded, you can't assume there is coverage. There are often other provisions of a policy that may ban coverage, such as an exclusion for intentional misconduct, an exclusion for any violation of law, or an exclusion for multiple damages, fines, or penalties. However, it is possible to negotiate with an insurance carrier to add coverage for these damages for additional premium.
But wait — you still may not have the protection you need. Whether the coverage provided in the policy is allowable varies from state to state. Depending on the jurisdiction, several situations may exist:
State law or judicial interpretation may prohibit coverage for punitive damages altogether;
Punitive damages may be fully allowed under liability policies;
Insurance may be allowed in some circumstances, but prohibited in others;
Insurance may cover vicarious punitive damages in which another party, a parent organization or employer, for example, is held liable for the conduct of another person or entity (e.g., punitive damages assessed against an HMO for the acts of an employee who intentionally denied coverage for his ex-wife's surgery in order to retaliate against her); or
The issue may not yet be resolved in the state in which the claim originates. (You could have a situation where the incident occurred in State A while the health plan bought its insurance in State B. Which law applies? The state law that restricts coverage or the state law that allows it? This would be a difficult call. A principle called "conflicts of law" would apply, and who knows what position the court would take?)
One way an HMO can achieve some coverage for punitive damages, even in states in which insurability is not allowed, is to amend its policy with "most favorable venue" language. That is an agreement between the insurance company and the HMO that the law of the jurisdiction most favorable to the insurability of punitive damages shall control, provided such jurisdiction:
Is where such punitive damages were awarded or imposed, or
Is where the parent corporation or any subsidiary is incorporated or otherwise organized or has a place of business, or
Is where the underwriter is incorporated or has its principal place of business.
HMOs should consult their broker or legal counsel to determine whether punitive damages are insurable in their jurisdiction. That's a no-brainer, you say? Not necessarily. Most people have no clue that punitive damages may not be insurable. If this type of insurance is available, it is important for HMOs to consider purchasing it and to carefully review policy terms.
Susan R. Huntington, J.D., has over 20 years experience in the health care industry and is currently the underwriting counsel and director of risk management at Executive Risk, a professional liability insurance company. These are her personal comments and do not reflect any coverage position by Executive Risk.