No. 83-299 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1984 

FIRST BANK (N.A.)-BILLINGS, 

Plaintiff , 

TRAP;ISAfi5ERICA INSURANCE CO. , 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 not considered or known to be wrongful 

prior to imposition of the award. See. e.g., Gates v. Life 

of Montana Ins. Co. (Mont. 1983), 668 P.2d 213, 40 St.Rep. 

1287 (reinstating punitive damage award against defendant 

for conduct which at time committed was not actionable). In 

these instances, forbidding coverage after the fact may work 

an injustice to unsuspecting defendants. 

We have recently attempted to come to grips with the 

problem of uncertainty in the area of punitive damages. In 

Owens v. Parker Drilling Co., (Mont. 1984), P.2d I 

41 St.Rep. 66, this Court acknowledged the expanded 

availability of punitive damage awards based on concepts 

like gross negligence, recklessness and unjustifiability. 

With respect to presumed malice as a ground specified in 

Section 27-1-221, MCA, for imposing exemplary or punitive 

damages, this Court adopted the following standard: 

"When a person knows or has reason to 

know of facts which create a high degree 

of risk of harm to the substantial 

interests of another, and either 

deliberately proceeds to act in conscious 

disregard of or indifference to that 

risk, or recklessly proceeds in 

unreasonable disregard of or indifference 

to that risk, his conduct meets the 

standard of willful, wanton, and/or 

reckless to which the law of this State 

will allow imposition of punitive damages 

on the basis of presumed malice." 

Owens, supra, 41 St. Rep. at 69. Although we have described 

this standard as "more definitive and perhaps more stringent 

than those of the past," Owens, supra, 41 St.Rep. at 69, we 

acknowledge that fact-finders may still wrestle with 

concepts like recklessness and reasonableness, such that 

defendants may not know that their conduct constituted 

presumed malice until after trial, and that a defendant in 
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 
that position unacceptable. The problems posed by insurance 

coverage of punitive damages are unquestionably like those 

inherent in the Gordian Knot. Unlike Alexander the Great, 

however, we cannot make a clean slice through our version of 

the Knot, in order to unravel all the aspects of the 

question before us, without working an injustice to many 

policy holders. Alexander dealt only with an inanimate 

object; we deal with people. Use of the judicial sword 

therefore is inappropriate in this case. Here, we must 

"untie" the knot, painstaking as the process may be. Until 

such time that the law of punitive damages is more certain 

and predictable, or until the legislature alters the law of 

punitive damages or expressly declares a policy against 

coverage in all cases, we leave the decision of whether 

coverage will be permitted to the insurance carriers and 

their customers. 

We concur: 

Honorable Gordon R. Bennett, 

District Judge, sitting in 

place of Chief Justice Frank 

I. Haswell. 

Mr. Justice Frank B. Morrison, Jr., specially concurs and will 

file a special concurrence later.