Why it matters: According to a divided Delaware Supreme Court, an insured’s payment of $9 million to settle underlying litigation was not a “penalty” and therefore required indemnification from the insurer. The insured settled two class action lawsuits brought for violations of a Louisiana statute and sought coverage from its insurer. The insurer refused, arguing that the settlement agreement fell under a policy exclusion for “fines, penalties or taxes,” which eliminated coverage. A trial court agreed but a majority of Delaware’s highest court reversed. The court ruled the underlying litigation was based on a Louisiana law that provided for statutory damages, not penalties: “Quite simply, in Louisiana, if the statute does not characterize the damage award entered as a ‘penalty,’ then it is not a ‘penalty’ under Louisiana law,” the court held, citing a Louisiana appeals court decision for support. The dissent took issue with the majority’s deference to the Louisiana court’s interpretation, contending that the trial court’s decision was properly based on a contract interpretation of the policy at issue.

Detailed discussion: CorVel Corporation owns and operates a preferred provider organization (PPO) network throughout the United States. Pursuant to Louisiana statute, CorVel received approval to operate its network in the state but was required to provide notice to medical providers when a discount rate on medical services was applied.

Companies that fail to comply with the notice requirement incur financial consequences. Specifically, La.R.S. Section 40:2203.1(G) states: “Failure to comply with the [notice provisions] of this Section shall subject a group purchaser to damages payable to the provider of double the fair market value of the medical services provided, but in no event less than the greater of fifty dollars per day of noncompliance or two thousand dollars, together with attorney fees to be determined by the court.”

Medical providers brought two class actions against CorVel in Louisiana state court based on violations of the statute. CorVel agreed to settle the litigation for $9 million, and assigned to the plaintiffs its rights under two policies issued by Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company.

Homeland then filed an action against CorVel in Delaware court seeking declaratory relief, claiming that because of an exclusion for “penalties” the settlement was not a covered loss under the policy. The exclusion provided: “Loss shall not include: (1) fines, penalties or taxes; provided that (A) punitive damages shall not be deemed to constitute fines, penalties or taxes for any purpose herein….”

A trial court agreed with the insurer and CorVel appealed. The appellate court reversed.

While the case was pending before the state’s highest court, an important development emerged in the pretrial Louisiana case. Executive Risk had similarly objected to providing coverage based on a “penalty” exclusion and a trial court held that damages under La.R.S. Section 40:2203.1(G) are statutory damages, not penalties.

According to a Louisiana trial court, the insurance policy issued by Executive Risk to CorVel covered the settlement agreement and therefore, the insurer was responsible for the settlement payment. When an appellate panel in the state affirmed the ruling, Executive Risk settled the case.

Before the Delaware Supreme Court, CorVel pointed out that Louisiana courts, interpreting their own state statute, had determined the law did not constitute a penalty but awarded statutory damages. Homeland argued that the Delaware trial court’s opinion was soundly based in contract interpretation and how the policy at issue applied to the Louisiana statute.

Emphasizing the importance of comity, the court reversed summary judgment for the insurer and followed the lead of the Louisiana courts. “Where a foreign statute has been interpreted by courts of the state of its origin, such interpretation should be followed in other states where the statute is applied,” the majority wrote. “Pursuant to the doctrine of comity, the courts of a sister state should adopt the decision of the highest tribunal of the enacting state concerning construction of the statute.”

The Louisiana appellate court “considered the same Louisiana statute and analyzed almost identical insurance policy language as that involved in this case,” the court explained, adopting “its reasonable interpretation as our own. We find that La.R.S. Section 40.2203.1(G) provides for statutory damages, not penalties. Thus, we find that the amount CorVel paid to settle the Louisiana Litigation, including attorneys’ fees, is not excluded from the definition of ‘Loss’ by the insurance policy provision that excludes ‘penalties.’”

Louisiana law governed how the settlement should be characterized, the court added, and the trial court erred when it applied common law principles rather than Louisiana’s civil law. “Quite simply, in Louisiana, if the statute does not characterize the damage award entered as a ‘penalty,’ then it is not a ‘penalty’ under Louisiana law,” the majority wrote.

A dissenting opinion, while sharing the majority’s “desire to respect principles of comity” took the position that because insurance law is contractual in nature, the trial court had no need to look to Louisiana state law. Instead, the court properly considered how the statute should be categorized under the language of the policy itself, the dissent argued.

To read the opinion in CorVel Corporation v. Homeland Insurance Company of New York, click here.