No. 83-299
IN THE SUPREME COURT OF THE STATE OF MONTANA
1984
FIRST BANK (N.A.)-BILLINGS,
Plaintiff ,
INSURANCE CO. ,
TRAP;ISAfi5ERICA
a foreign corp.,
Defendant.
ORIGINAL PROCEEDING:
COUNSEL OF RECORD:
For Plaintiff:
Moulton, Bellingham, Longo & Mather; Ward Swanser
and Greg Murphy argued for First Bank, Billings,
Montana
For Defendant:
Crowley, Haughey, Hanson, Toole & Dietrich; Bruce
R. Toole and Carolyn Ostby argued for Transamerica
Ins. Co., Billings, Montana
Submitted: Xovember 29, 1983
Decided: April 3, 1984
Filed:
APR 31384
Clerk
Mr. Justice L.C. Gulbrandson delivered the Opinion of the
Court.
The United States District Court for the District of
Montana has certified two questions to this Court for
instructions concerning Montana law.
First Bank Billings has been named a defendant in
three wrongful repossession cases, two of which have been
filed in the District Court of the Thirteenth Judicial
District, Yellowstone County, and one in the United States
District Court for the District of Montana. Transamerica
has undertaken the defense of First Bank, but has reserved
its rights under its insurance contract with the bank and
has denied any coverage for punitive damages under this
contract. Transamer ica argues that the public policy of
Montana forbids such coverage. On motion of First Bank, the
United States District Court has certified the following
questions to this Court:
(1) Does the public policy of Montana permit insurance
coverage of punitive damages?
(2) If the public policy of Montana does not generally
permit insurance coverage of punitive damages, would it
nevertheless permit coverage for punitive damages for which
a banking corporation is or could be held liable by reasons
of the acts of its employees?
For the reasons stated below, we conclude in response
to the first question that insurance coverage of punitive
damages is not a violation of public policy. Thus, we need
not address the substance of the second question.
Counsel for First Bank have presented ten
considerations in support of permitting insurance coverage
of punitive damages. Transamerica has mounted a strong
challenge to all of these considerations. We recognize that
there is considerable authority supporting the positions of
both parties. See generally Annot., 16 ALR 4th 11 (1982)
(comparing and contrasting different views on liability
insurance coverage as extending to liability for punitive or
exemplary damages). We note, however, that most of the
important decisions, as well as the major arguments of the
parties, emphasize three primary considerations as
ultimately dispositive of the questions before us. These
are (1) public policy as expressed in constitutions and
statutes; (2) the purpose of punitive damages; and (3) the
circumstances under which punitive damages become available
to aggrieved plaintiffs. Although we address these matters
separately in this opinion, we recognize that they are
interrelated to a high degree, and we therefore are careful
not to sever the important ties that bind them together.
Before proceeding to the critical issues, we must
first address a disagreement between the parties concerning
the focus of our review. First Bank has urged this Court to
center on what it claims are the "blanket terms" of the
insurance contract, wherein Transamerica agrees to "pay on
behalf of the insured all sums which the insured shall he
legally obligated to pay as damages because of personal
injury or advertising injury to which this insurance applies
... " First Bank inferentially asks this Court to answer
the certified question in light of this contract language.
Specifically, we are asked to decide whether public policy
bars coverage even when the contract supposedly provides
indemnification for "all sums" arising from liability.
We reject the approach suggested by First Bank.
Transamerica correctly notes that the certified questions
forwarded by the Federal District Court do not call for an
interpretation of contract language. We are asked only to
decide whether public policy permits or bars coverage of
punitive damages, regardless of the contract language. We
leave the threshold issue of contract interpretation for the
Federal District Court to decide. For similar reasons, we
also decline to review allegations by First Bank that
Transamerica is attempting to "wriggle out" of its
negotiated insurance contract. That, too, is a matter for
decision by the District Court.
SOURCES OF PUBLIC POLICY IN MONTANA
"Public policy is that principle of law which holds
that no citizen can lawfully do that which has a tendency to
be injurious to the public or against public good."
Spaulding v. Maillet (1920), 57 Mont. 318, 323, 188 P. 377,
378-9. Public policy is typically found "in the
constitution and the laws and the course of administration."
St. Louis Mining & Milling Co. v. Montana Mining Co. (1898),
171 U.S. 650, 655, 19 S.Ct. 61, 63, 43 L.Ed. 320, 322. In
determining the public policy of this state, legislative
enactments must yield to constitutional provisions, and
judicial decisions must recognize and yield to
constitutional provisions and legislative enactments.
Progressive Life Ins. Co. v. Dean (1936), 192 Ark. 1152, 97
S.W.2d 62; Electrical Contractors' Assln v. A.S. Schulman
Elec. Co. (1945), 391 Ill. 333, 63 N.E.2d 392. Judicial
decisions are a superior repository of statements about
public policy only in the absence of constitutional and
valid legislative declarations. State ex rel. Holt v.
District Court (1936), 103 Mont. 438, 446, 63 P.2d 1026,
1029; State v. Gateway Mortuaries, Inc. (1930), 87 Mont.
225, 235, 287 P. 156, 157.
PUBLIC POLICY AS EXPRESSED IN THE CONSTITUTION AND STATUTES
We find nothing in the Montana Constitution declaring
a public policy on the question before us. We therefore
turn to relevant statutes and case law construing the same.
Prior to adoption of this state's comprehensive
insurance code, Sections 33-1-101 et. seq., MCA, the law of
Montana provided that "[aln insurer is not liable for a loss
caused by the willful act of the insured; but he is not
exonerated by the negligence of the insured, or of his
agents or others." Section 40-604, R.C.M. 1.947 [repealed
19591. This statute was based on Cal.Ins.Code Section 533
(West 1972), which has been construed to prohibit insurance
coverage of punitive damages in most instances in
California. See, e.g., City Products Corp. v. Globe Indem.
Co. (1979), 88 Cal.App.3d 31, 151 Cal.Rptr. 494. See
generally Comment, Insurance for Punitive Damages: A
Reevaluation 28 Hastings L. J. 431, 446-58 (1976)
(discussion of California public policy against insurance
coverage of punitive damages). Section 40-604 is no longer
law in Montana, having been repealed upon adoption in 1959
of the insurance code. Transamerica argues that repeal
"does not mean that the legislature intended to bless the
sins of cheats, frauds, and oppressors, and absolve them
from wrongdoing. " While there is some truth in this
assertion, we conclude that not even Transamerica would
argue that a repealed statute has a life beyond the grave.
If there is a public policy against permitting coverage, it
must flow from an existing statute.
Our attention is also directed to the punitive damages
law, Section 27-1-221, MCA, which provides that:
"[iln any action for a breach of an
obligation not arising from contract
where the defenda.nt has been guilty of
oppression, fraud, or malice, actual or
presumed, the jury, in addition to the
actual damages, may give damages for the
sake of example and by way of punishing
the defendant."
There is nothing in this statute amounting to an express
statement on the public policy issue before us.
Nevertheless, Transamerica reasons syllogistically that,
because punishment is an explicit aim of applying punitive
damages, and because punishment, to be such, must cause its
recipient to suffer, there can be no punishment if a
defendant is permitted to, in effect, "shift" the financial
burden of the imposed punishment to his or her insurance
carrier. Transamerica thus concludes that a public policy
against coverage emanates from the concept of punishment as
embodied in the statute. This is the conclusion reached by
courts in some states with the same or similar punitive
damage laws, see, e.g., City Products, supra (construing
Cal.Civ.Code Section 3294, which contains virtually the same
language as Section 27-1-221). Although we are impressed
with the reasoning behind Transamerica's argument, we reject
it, for reasons discussed infra, as an inaccurate expression
of the practical consequences of applying punitive damages
law in some cases in Montana.
Transamerica also directs our attention to Section
28-11-302, MCA, which provides that "[aln agreement to
indemnify a person against an act thereafter to be done is
void if the act be known by such person, at the time of
doing it, to be unlawful." Transamerica reasons that,
because insurance is a contract of indemnity, Section
28-11-302 operates as an express policy against coverage for
tortious acts warranting imposition of punitive damages. We
reject this interpretation.
Modern insurance contracts typically provide coverage
for a host of tortious activities, with the assurance that
the insured will be indemnified at least for compensatory
damages arising from unlawful conduct by the insured; e . g . ,
libel and slander, malicious prosecution, etc. Even
Transamerica would not argue that Section 28-11-302 erects a
bar to liability insurance for compensatory damages, be they
awarded for ordinary negligence or malicious, fraudulent or
oppressive conduct. The need to reduce financial risks and
promote economic stability in modern society has rendered
this statute applicable only to conduct defined as criminal.
In summary, we find no express policy by the
legislature on the subject of insurance coverage for
punitive damages. Although reasoned arguments can be made
for reading some kind of prohibition into the language of
the punitive damages statute, we decline to do so without
first examining judicial construction of that statute and
then considering the practical consequences of awarding
punitive damages.
PUBLIC POLICY IN LIGHT OF JUDICIAL DECISIONS
As noted above, a major aim of awarding punitive
damages is punishment of the defendant for oppressive,
fraudulent or malicious conduct. We have also recognized
that an award of punitive damages can serve as a deterrent
to like conduct by other individuals. First Security Bank
v. Goddard (1979), 181 Mont. 407, 423, 593 P.2d 1040, 1049;
Butcher v. Petranek (1979), 181 Mont. 358, 363, 593 P.2d
743, 745. Whether both goals will be served adequately by
permitting insurance coverage of punitive damages has been
the principal concern of courts that have already addressed
the coverage question.
Several courts have followed the lead of the Court of
Appeals of the Fifth Circuit and have concluded that the
mutual goals of punishment and deterrence are defeated if
coverage is permitted. In Northwestern Nat'l Cas. Co. v.
McNulty (5th Cir. 1962), 307 F.2d 432, Circuit Judge John
Minor Wisdom made this oft-quoted observation:
"Where a person is able to insure himself
against punishment he gains a freedom of
misconduct inconsistent with the
establishment of sanctions against such
misconduct. It is not disputed that
insurance against criminal fines or
penalties would be void as violative of
public policy. The same public policy
should invalidate any contract of
insurance against the civil punishment
that punitive damages represent.
"The policy considerations in a state
where ... punitive damages are awarded
for punishment and deterrence, would seem
to require that the damages rest
ultimately as well as nominally on the
party actually responsible for the wrong.
If that person were permitted to shift
the burden to an insurance company,
punitive damages would serve no useful
purpose. Such damages do not compensate
the plaintiff for his injury, since
compensatory damages already have made
the plaintiff whole. And there is no
point in punishing the insurance company;
it has done no wrong. In actual fact, of
course, and considering the extent to
which the public is insured, the burden
would ultimately come to rest not on the
insurance companies but on the public,
since the added liability to the
insurance companies would be passed along
to the premium payers. Society would
then be punishing itself for the wrong
committed by the insured."
307 F.2d at 440-41. For similar views, see City Products
Corp., supra; Ford Motor Co. v. Home Ins. Co. (1981), 116
Cal.App.3d 374, 172 Cal.Rptr. 59; Hartford Acc. & Indem. Co.
v. Village of Hempstead (1979), 48 N.Y.2d 218, 397 N.E.264
737, 422 N.Y.S.2d 47; First Nat'l Bank of St. Mary's v.
Fidelity & Deposit Co. (1978) 283 Md. 228, 389 A..2d 359,
367 (Levine J., dissenting); Harrell v. Travelers Indem. Co.
(1977), 279 Or. 199, 567 P.2d 1013, 1022 (Holman, J.,
dissenting).
Upon reflection, we grant the intellectual appeal of
Judge Wisdom's reasoning, and recognize that it has been
both praised and followed in other jurisdictions.
Nevertheless, we find that this reasoning does not address
the substance of punitive damages law as applied in Montana.
To determine public policy concerning insurance coverage of
punitive damages solely on deductive conclusions like those
articulated by Judge Wisdom "is to lean upon a slender
reed." Missouri v. Holland (1920), 252 U.S. 416, 434, 40
Oregon Supreme Court Justice Hans Linde correctly
observed in his concurring opinion in Harrell, supra, that
"[a] court-made public policy against otherwise lawful
liability insurance can be defended, not because the purpose
of punitive damages is always deterrence and - -
because
insurance will always destroy their deterrent effect, but
only when these considerations apply." (emphasis his). 279
Or. 199, 567 P.2d at 1029. Empirical observation informs us
that many kinds of willful and wanton conduct are never
successfully deterred by punitive damage awards. This is
especially true in automobile accident cases. See, e.g.,
the discussion in Lazenby v. Universal Underwriters Ins. Co.
(1964), 214 Tenn. 639, 383 S.W.2d 1, concerning the failure
of civil and criminal sanctions to deter wrongful conduct on
the highways. We have few doubts that the deterrent impact
is minimal in cases involving other types of tortious
conduct. This leaves punishment as perhaps the only
effectively realizable goal of awarding punitive damages.
However, as will be pointed out in the discussion infra,
punishment in the context of punitive damages may come as a
wholly unanticipated aspect of one's conduct, thus weakening
the case against permitting insurance coverage of all
punitive damage awards.
In the instant dispute, First Bank fears that its
insurance contract with Transamerica will become virtually
worthless if it is exposed to punitive damage awards without
the possibility of coverage. The Bank also claims that such
a fine line exists between conduct justifying imposition of
punitive damages and conduct not justifying such damages
that permitting coverage is not in violation of public
policy. Both arguments warrant serious attention.
The contract issued by Transamerica to First Bank is
not unlike many insurance agreements. It includes coverage
for false arrest, detention, or imprisonment, malicious
prosecution, wrongful entry or eviction, libel and slander,
racial or religious discrimination, and wrongful
repossession. All of these torts give rise to claims for
punitive damages; on this there is no dispute. In many
cases involving these torts, actual damages may be minimal,
but the punitive damages extremely high. Indeed, many
claims for relief are not made financially worthwhile
without the prospect of recovering punitive damages. See
Harrel, supra, 279 Or. 199, 567 P.2d at 1029 (Linde, J.,
concurring). Assuming that coverage was deemed contrary to
public policy, and in the event of minimal, if any
compensatory damages, an insured facing a significant award
of punitives would receive little solace from what would
amount to a worthless insurance policy.
The "fine-line" problem raised by First Bank also
suggests that a public policy against coverage would have
less than desirable results, especially where the defendant
is again assessed a particularly large punitive damage
award. A consistent theme running through cases holding
that public policy does not forbid insurance coverage is
that juries and judges typically award punitives for a broad
range of conduct not often described as willful or wanton,
but as merely reckless or unjustifiable. When combined with
the possibility that different fact finders in similar fact
situations may reach differing conclusions as to the
availability of punitive damages, the argument for denial of
coverage becomes difficult to sustain. See Skyline
Harvestore Systems, Inc. v. Centennial Ins. Co. (Iowa 1983),
331 N.W.21 106; First Nat'l Bank of St. Mary's, supra;
Harrel, supra; Lazenby, supra. See also Comment, Insurance
Coverage of Punitive Damages 84 Dick.L.Rev. 221, 231-33
(1980). First Bank also emphasizes, and not without good
reason, that a defendant may be subject to a punitive damage
award for conduct n o t considered o r known to be wrongful
p r i o r t o i m p o s i t i o n of t h e award. See. e.g., G a t e s v. Life
o f Montana I n s . Co. (Mont. 1 9 8 3 ) , 6 6 8 P.2d 213, 40 S t . R e p .
1287 (reinstating punitive damage a w a r d against defendant
f o r c o n d u c t w h i c h a t t i m e c o m m i t t e d was n o t a c t i o n a b l e ) . In
t h e s e i n s t a n c e s , f o r b i d d i n g c o v e r a g e a f t e r t h e f a c t may work
an i n j u s t i c e t o unsuspecting defendants.
W e h a v e r e c e n t l y a t t e m p t e d t o come t o g r i p s w i t h t h e
problem of u n c e r t a i n t y i n t h e a r e a o f p u n i t i v e damages. In
Owens v . P a r k e r D r i l l i n g C o . , (Mont. 1 9 8 4 ) , P.2d I
41 St.Rep. 66, this Court acknowledged the expanded
availability of punitive damage awards based on c o n c e p t s
like gross negligence, recklessness and unjustifiability.
With respect t o presumed m a l i c e a s a ground specified in
S e c t i o n 27-1-221, MCA, for imposing exemplary o r punitive
damages, t h i s C o u r t a d o p t e d t h e f o l l o w i n g s t a n d a r d :
"When a p e r s o n knows o r h a s r e a s o n t o
know of f a c t s w h i c h c r e a t e a h i g h d e g r e e
o f r i s k o f harm t o t h e s u b s t a n t i a l
interests of another, and either
d e l i b e r a t e l y proceeds t o a c t i n conscious
disregard of o r i n d i f f e r e n c e t o t h a t
risk, or recklessly proceeds in
unreasonable disregard of o r i n d i f f e r e n c e
t o t h a t r i s k , h i s c o n d u c t meets t h e
s t a n d a r d of w i l l f u l , wanton, and/or
r e c k l e s s t o which t h e law of t h i s S t a t e
w i l l a l l o w i m p o s i t i o n o f p u n i t i v e damages
on t h e b a s i s o f presumed m a l i c e . "
Owens, s u p r a , 4 1 S t . Rep. a t 69. Although w e have d e s c r i b e d
t h i s s t a n d a r d as "more d e f i n i t i v e a n d p e r h a p s more s t r i n g e n t
t h a n t h o s e of t h e p a s t , " Owens, s u p r a , 4 1 S t . R e p . a t 69, w e
acknowledge that fact-finders may still wrestle with
concepts like recklessness and reasonableness, such that
defendants may not know that their conduct constituted
presumed m a l i c e u n t i l a f t e r t r i a l , and t h a t a d e f e n d a n t i n
one case may never know the sting of punitive damages while
another defendant in a similar case may be faced with
financing a sizeable award. Similarly, we have yet to work
out a definitive standard for "oppression" within the
meaning of Section 27-1-221.
Even though we are further down the road to refining
the concept of punitive damages than are many other state
courts, the law is still in such a state of flux as to
warrant caution on the issue of whether public policy
prohibits coverage of punitive damages in all cases. We
therefore decline the opportunity to define limits for
insurance coverage of punitive damages. Insurance companies
are more than capable of evaluating risks and deciding
whether they will offer policies to indemnify all or some
conduct determined by judges or juries to be malicious,
fraudulent or oppressive. A likely response to this opinion
by some carriers may be the drafting of specific exclusions
of coverage of punitive damages. However, the fact that
some individuals may be willing to pay higher premiums for
such coverage may convince carriers to extend coverage in
some situations. It is conceivable that a combination of
different approaches by insurance companies may result in a
delineation of the limits of coverage better than anything
this Court could establish.
CONCLUSION
We find that providing insurance coverage of punitive
damages is not contrary to public policy. Transamerica
admittedly has set forth a strong argument in support of an
opposite holding, but we find the consequences of adopting
t h a t p o s i t i o n unacceptable. The problems posed by i n s u r a n c e
coverage of p u n i t i v e damages a r e unquestionably l i k e t h o s e
i n h e r e n t i n t h e Gordian Knot. Unlike Alexander t h e G r e a t ,
however, we cannot make a c l e a n s l i c e through our v e r s i o n of
the Knot, in order to unravel all the aspects of the
question before us, without working an i n j u s t i c e t o many
policy holders. Alexander dealt only with an inanimate
object; we d e a l w i t h people. Use of the judicial sword
therefore is inappropriate in this case. Here, we must
" u n t i e " t h e knot, p a i n s t a k i n g a s t h e p r o c e s s may be. Until
such time t h a t t h e law of p u n i t i v e damages i s more c e r t a i n
and p r e d i c t a b l e , or u n t i l t h e l e g i s l a t u r e a l t e r s t h e law of
punitive damages or expressly declares a policy against
coverage in all cases, we leave t h e d e c i s i o n of whether
coverage w i l l be permitted to the insurance c a r r i e r s and
t h e i r customers.
W concur:
e
Honorable Gordon R. B e n n e t t ,
D i s t r i c t Judge, s i t t i n g i n
p l a c e of Chief J u s t i c e Frank
I . Haswell.
Mr. J u s t i c e Frank B . Morrison, J r . , s p e c i a l l y concurs and w i l l
f i l e a s p e c i a l concurrence l a t e r .