Punitive damages have been a real risk to vessel owners since 2009, when the Supreme Court in Atlantic Sounding Co., Inc. v. Townsend, 129 S.Ct. 2561 (2009) restored the availability of punitive damages for an employer’s willful and wanton disregard of its maintenance and cure obligation. Since Townsend, cases involving an employer’s wanton failure to make maintenance and cure payments have occasionally yielded staggering punitive damages awards. For example, in Clausen v. Icicle Seafoods, Inc., 174 Wash. 2d 70, 272 P.3d 827 (2012), the Supreme Court of Washington upheld a jury’s award of $1,300,000 in punitive damages based on a maritime employer’s withholding of maintenance and cure to the severe detriment of an injured seaman.
Due to the serious punitive liability to which vessel owners are exposed, there is great demand for coverage for punitive damages in marine insurance policies. While many marine insurance policies expressly exclude coverage, some are silent on punitive damages (usually for an additional premium). However, there is a great deal of uncertainty as to whether such policies will be interpreted by courts to provide coverage. There is no general maritime law rule on point. The approach taken by the Fifth Circuit to determine whether punitive damages are covered under a silent marine insurance policy is to look to the public policy of the state with the greatest interest in the dispute. Taylor v. Lloyd's Underwriters of London, 972 F.2d 666 (5th Cir. 1992).
This approach is problematic and presents a high level of unpredictability for insurers. First, the court must select which state’s law governs the dispute, which can involve a complicated choice of law analysis. Second, even after a state is selected, the insurability of punitive damages under that state’s law may be unclear. Third, one can easily imagine a situation in which two states have an interest in the dispute. If those two states are, for example, Florida, where courts hold public policy restricts liability insurance coverage for punitive damages, and Texas, where punitive damages may be covered, the court’s choice of law analysis will be dispositive of whether the insurer is liable for the punitive damage award.
Unless and until federal courts resolve the issue by fashioning a general maritime rule that governs this coverage question, a collection of conflicting state laws will determine whether the insured is covered for punitive damages by a marine insurance contract.