83 N.Y.2d 718 (1994)
An insurer cannot be held liable for the punitive damages portion of a judgment exceeding policy limits, even if the insurer acted in bad faith by refusing a settlement offer within those limits.
Summary
This case addresses whether an insurer, acting in bad faith by refusing a settlement offer within policy limits, can be liable for the punitive damages portion of a judgment exceeding those limits. The New York Court of Appeals held that public policy precludes such liability. While an insurer may be liable for the excess judgment when refusing to settle in bad faith, this does not extend to punitive damages because these are meant to punish the wrongdoer (the insured), and allowing the insurer to pay would undermine this purpose. The insured’s own conduct is the reason punitive damages were awarded.
Facts
Elisio Montanez, driving Mary Casey’s car (his girlfriend), caused a fatal accident, killing Nelson Rivera and Angel Luis Echevarria. Montanez was legally blind without glasses and intoxicated. The victims’ administrators sued Casey and Montanez. The insurance policy limit was $50,000 per death. The insurer, State Farm, refused to settle within the policy limits, arguing Casey had not consented to Montanez driving the car. The jury found Montanez had permission and awarded significant compensatory and punitive damages exceeding the policy limits. State Farm paid the compensatory damages but refused to pay the punitive damages.
Procedural History
The victims’ administrators, as assignees of Montanez’s and Casey’s rights, sued State Farm, alleging bad faith refusal to settle. The trial court dismissed the complaint. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and affirmed the dismissal.
Issue(s)
Whether an insurer who acts in bad faith by refusing to settle a claim within the policy limits can be held liable for the portion of a judgment that represents punitive damages assessed against the insured.
Holding
No, because New York’s public policy prohibits indemnification for punitive damages, even when the insurer acted in bad faith. The court reasoned that allowing recovery for punitive damages would undermine their purpose of punishing the wrongdoer.
Court’s Reasoning
The court acknowledged that an insurer refusing a reasonable settlement offer in bad faith is generally liable for the excess judgment. However, punitive damages are different. The court emphasized New York’s long-standing policy against indemnification for punitive damages, stating it is a “fundamental principle that no one shall be permitted to take advantage of his own wrong”. The court reasoned that punitive damages are designed to punish and deter the wrongdoer, not to compensate the plaintiff. Allowing the insurer to pay these damages would defeat this purpose, even if the insurer acted wrongfully in refusing to settle. The court stated that the insurer’s bad faith only put the insured at risk of a jury finding them morally culpable, warranting punitive damages. “Regardless of how egregious the insurer’s conduct has been, the fact remains that any award of punitive damages that might ensue is still directly attributable to the insured’s immoral and blameworthy behavior.” The court distinguished this situation from one where the insured seeks punitive damages from the insurer for the insurer’s own misconduct.