Recent developments point towards greater receptivity to punitive damages. In the past few months punitive damages have received increasing attention, not only from the legislature (leading to a proposed revision to the Civil Code), but also from the Court of Cassation.
On December 1 2010 the Court of Cassation issued an interesting decision with regard to foreign judgments granting punitive damages. Whether insurance coverage will be available for foreign decisions awarding punitive damages may be a vital question for insureds, insurers and plaintiffs.
The dispute involved a US couple residing in the United States who had purchased a yacht manufactured in France. The yacht sustained serious structural damage during a storm before delivery to the purchaser. The manufacturer performed repairs, but kept silent about the incident and the repairs. After noticing some defects due to the repairs which could make the yacht potentially dangerous, the purchaser initiated proceedings. However, the manufacturer refused to participate in these proceedings. In February 2003 the Superior Court of California, County of Alameda, ordered the manufacturer to pay a total amount of $3.25 million, including $1.46 million by way of punitive damages.
The issue was whether this judgment could be enforced in France, despite the prohibition on punitive damages. For the first time, the Court of Cassation held that foreign judgments awarding punitive damages are not per se contrary to international public policy and can in principle be enforced in France. However, the award of punitive damages is admitted subject to a proportionality test with the damage sustained. In the case at hand the punitive damages were found to be manifestly disproportionate and, as a result, enforcement was denied.
One significant element which has received little attention so far was the direct joinder of the liability insurer and the finding by the French court of appeal that the insurance policy contained an exclusion clause for punitive damages.
An important distinction with regard to punitive damages must be drawn between civil law and common law countries. Under common law, punitive damages may be awarded by the judge, in addition to compensatory damages, in order to punish the wrongdoer and deter others from engaging in similar conduct. However, these principles of deterrence and punishment are traditionally absent from civil law. Under French law, damages must fully, but only, repair the harm caused (the 'principle of full compensation'). As a result, punitive damages are not admitted.
The enforcement of foreign decisions granting punitive damages in accordance with foreign laws is a different issue and also raises the question of coverage under an insurance policy governed by French law when it provides worldwide liability coverage.
Some liability policies specifically address punitive damages and exclude coverage. As evidenced by the French court of appeal's finding in the present case, an insurance company is free to exclude punitive damages by an exclusion clause.
If a policy is silent about covering punitive damages or expressly provides cover (as may be the case for policies in the air and space industry), then the insurability issue arises regarding those damages and the underlying conduct which led the court to grant them.
Under French law, the insured's wilful misconduct is legally not covered. 'Wilful misconduct' is defined as the intent to cause the damage as it occurred (and not another damage). All damages (including punitive damages) awarded because of the insured's wilful misconduct are not insurable. Therefore, the insurer could deny coverage based on the wilful misconduct exclusion, irrespective of the type of damages awarded by the court.
The insurability of punitive damages as such is likely to arise in cases where those damages are awarded by a foreign court because of wrongful acts where there is no evidence of intent to cause the damage as it occurred. This is illustrated by the case at hand. The yacht sustained serious structural damage because of a storm; nevertheless, the defendants were punished for having kept silent about the storm, the damage and the repairs, and for having frustrated proceedings. Although the coverage for punitive damages was not at issue because the insurance policy contained an exclusion clause, the case provides a good example of factual circumstances which could lead to a debate on the insurability of punitive damages.
Whether the law should allow insurance coverage for punitive damages is under debate. Some legal commentators consider that admitting insurance would undermine the deterrent value of punitive damages and violate public policy considerations. However, others point out that punitive damages are penalties of a civil nature and should therefore be insurable. According to this view, the parties to an insurance policy are free to define contractually the scope of coverage, subject to statutory provisions.
In the absence of any provisions under French insurance law on the insurability of punitive damages, contractual provisions are important. As a result, a broad insurance policy covering "all sums which the insured shall become obligated to pay as damages" would in principle include punitive damages.
Attention may certainly be paid in this respect to two recent draft reforms of French law. The first (the avant-projet Catala, 2005) allows for the payment of punitive damages in certain circumstances, but states that punitive damages are not insurable. However, a more recent proposal (L Beteille's Report 558, in the name of the Senate's Committee Law, 2009) adopts a different point of view and favours the insurability of punitive damages.
Future discussions and decisions on this issue are awaited in the hope that they will clarify the situation. In the meantime, insureds and insurers should consider the point in the wording of the policy.
For further information on this topic please contact Rémi Passemard at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 7037 3900), fax (+ 33 1 7037 3901) or email ([email protected]).