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Several months ago, another lawyer asked me this question: Is there any prohibition in Alabama against punitive damages exclusions as it relates to commercial vehicle mandatory insurance coverage limits? Without looking it up, my initial thought on the matter was no, there isn’t any such prohibition. But that led to a more interesting version of the question: What is the practical effect of punitive damages exclusions on an insurer when a motor carrier has an MCS-90 Endorsement in place?

Well, that’s a pretty big house to build, so I want to lay a foundation, then build the thing one wall at a time. We’re going to take the question in four parts: (1) policy exclusions, generally; (2) punitive damages exclusions, specifically; (3) the insurer’s duty to defend its insured; and (4) the effect of MCS-90 Endorsements on punitive damages exclusions.

Policy Exclusions, Generally

“An exclusion in an insurance policy is a provision that eliminates coverage that would have existed in the absence of the exclusion.”[1] The Supreme Court of Alabama has clearly established that it will uphold insurance policy provisions that are narrowly constructed to disclose the nature and intent of the exclusion.[2]

Exceptions to insurance coverage “must be interpreted as narrowly as possible in order to provide maximum coverage to the insured. However, courts are not at liberty to rewrite policies to provide coverage not intended by the parties.[3] In the absence of statutory provisions to the contrary, insurance companies have the right to limit their liability and write policies with narrow coverage.[4] If there is no ambiguity, courts must enforce insurance contracts as written and cannot defeat express provisions in a policy, including exclusions from coverage, by making a new contract for the parties.”[5]

The rules of insurance policy interpretation also provide that exceptions to coverage are interpreted as narrowly as possible to provide maximum coverage for the insured.[6] Exceptions to coverage provisions must be construed most strongly against the company that drew the policy and issued it.[7] Where there is a dispute regarding the applicability of a policy exclusion, the insurer bears the burden of proving a policy exclusion is applicable.[8] Where there is “reasonable doubt or confusion” as to the meaning of a particular word used in an exclusion, or where a word or provision is “reasonably susceptible to two or more constructions,” an ambiguity exists, and when an exclusion is ambiguous, it must be construed against the insurer to find coverage.[9]

Punitive Damages Exclusions, Specifically

Punitive damages may be awarded as damages when there is a finding that a defendant acted with wanton conduct. In Alabama, wantonness is defined in Alabama Code (1975) § 6-11-20(b)(2) as “conduct that is carried out with a reckless or conscious disregard of the rights or safety of others.” Worded differently, wantonness is the conscious doing of some act or the omission of some duty while knowing the existing conditions that from doing or omitting to do an act injury will likely or probably result.

Most commercial auto and trucking insurance policies contain exclusions for punitive damages. Much as with other types of exclusions as discussed above, Alabama Courts have found that punitive damages exclusions do not violate public policy in personal injury cases, which is in accordance with Alabama law allowing insurance companies the right to limit their liability and write policies with narrow coverage.[10]

An important note here is that Alabama has a unique wrongful death statute, under which the only remedy available is punitive damages. And the courts have determined that an exclusion for punitive damages does not apply in a wrongful death case.

The Insurer’s Duty to Defend Its Insured

Even when policy exclusions exist that preclude coverage, an insurance company may still have a duty to defend its insured. The duty to defend is greater than the insurer’s duty to indemnify its insured.[11] “Whether an insurance company owes its insured a duty to provide a defense in proceedings instituted against the insured is determined primarily by the allegations contained in the complaint.”[12] The applicable test for gauging the existence of an insurer’s duty to defend is as follows: “The insurer owes no duty to defend only if neither does the complaint against the insured allege a covered accident or occurrence nor does the evidence in the litigation between insurer and insured prove a covered accident or occurrence.”[13]

Effect of the MCS-90 Endorsements on Punitive Damages Exclusions

As I described more thoroughly in a recent post, an MCS-90 Endorsement is a motor carrier’s proof that it has met the minimum financial requirements set by Congress. For motor carriers who obtain insurance to meet the minimum financial requirements, the insurer becomes obligated to pay for public liability that results from any negligent operation, maintenance, or use of any motor vehicle by the motor carrier or its driver, according to the terms of the endorsement. The insurer’s obligation to pay is very broad and is not limited by any exclusions in the insurance policy it issues to the motor carrier, possibly including punitive damages exclusions.[14]

The practical effect is this: Even though punitive damages may be excluded in an insurance policy, if a motor carrier or its driver is found liable for wanton conduct and punitive damages are awarded to a plaintiff, the insurance company (per the terms of the MCS-90 endorsement) may be obligated to pay the punitive damages award. But it then has the right to seek reimbursement from its insured. Whether the motor carrier and/or driver will have the assets to reimburse the insurance company is an entirely different matter. Regardless, the injured member of the public will not be left without an avenue to be compensated for her injuries.

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Footnotes

[1] Royal Ins. Co. of Am. v. Thomas, 879 So. 2d 1144, 1149 (Ala. 2003).

[2] See Nat’l Union Fire Ins. Co. v. City of Leeds, 530 So.2d 205 (Ala. 1988).

[3] Newman v. St. Paul Fire & Marine Insurance Co., 456 So. 2d 40, 41 (Ala. 1984).

[4] United States Fidelity & Guaranty Co. v. Bonitz Insulation Co. of Alabama, 424 So. 2d 569, 573 (Ala. 1982).

[5] Turner v. United States Fidelity & Guaranty Co., 440 So. 2d 1026, 1028 (Ala. 1983); see also Johnson v. Allstate Ins. Co., 505 So. 2d 362, 365 (Ala. 1987); Nationwide Mut. Ins. Co. v. Thomas, 103 So. 3d 795, 803 (Ala. 2012).

[6] See Guaranty Nat. Ins. Co. v. Marshall County Bd. of Educ., 540 So.2d 745 (Ala. 1989).

[7] See American Liberty Ins. Co. v. Soules, 256 So.2d 872 (Ala. 1972).

[8] See Acceptance Ins. Co. v. Brown, 832 So.2d 1 (Ala. 2001).

[9] See Porterfield v. Audubon Indem. Co., 856 So. 2d 789, 806 (Ala. 2002); see also United Services Automobile Association v. Vogel, 733 So. 2d 401, 404 (Ala. 1998) (affirming summary judgment in favor of insured and finding that language in exception was subject to more than one reasonable interpretation, was therefore ambiguous, and that court was required to construe provision to provide coverage); Mega Life and Health Ins. Co. v. Pieniozek, 585 F.3d 1399, 1406 (11th Cir. 2009) (construing Alabama law and finding that “[w]hen a term [in an insurance policy] is susceptible to multiple constructions, or there is reasonable doubt or confusion as to its meaning, the term is ambiguous as a matter of law.”).

[10] See Hill v. Campbell, 804 So.2d 1107 (Ala.Civ.App. 2001) (citing Hooper v. Allstate Ins. Co., 571 So.2d 1001 (Ala.1990); Ross Neely Systems, Inc. v. Occidental Fire & Casualty Co., 196 F.3d 1347 (11th Cir.1999)); see also Grimes v. Alfa Mut. Ins. Co. [Ms. 1150041 Jan. 27, 2017], — So.3d — (Ala. 2017).

[11] See e.g. Penn. Nat’l Mut. Cas. Ins. Co. v. Roberts Bros. Inc., 550 F.Supp. 2d 1295, 1304 (S.D. Ala. 2008); see also Tanner v. State Farm Fire & Cas. Co., 874 So.2d 1058, 1063 (Ala. 2003); Hartford Cas. Ins. Co. v. Merchants & Farmers Bank, 928 So.2d 1006, 1011 (Ala. 2005) (explaining that broad duty to defend arises from principle that ambiguous insurance policies must be construed liberally in insured’s favor).

[12] Tanner, 874 So.2d at 1063.

[13] Id. at 1065.

[14] See T.H.E Ins. Co. v. Larson Intermodal Servs., Inc., 242 F.3d 667, 670 (5th Cir. 2001) (holding that “an insurer’s responsibilities under the endorsement are triggered when the policy to which it is attached does not provide coverage to the insured.”); see also Canal Ins. Co. v. Carolina Cas. Ins. Co., 59 F.3d 281, 283 (1st Cir. 1995).

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