ECO liability generally is not limited by the reinsurance contract s general limit of liability. The clause also might have a provision for determining the date of loss, although the original date of loss is often used. More recently, ECO clauses have been amended to provide that the clause is only valid in jurisdictions where the insurability of punitive damages is not prohibited. It is this latter provision that leads us to the public policy debate. Punitive damages exist to punish a wrongdoer for aggravated, intentional, or willful acts against the public.
Different states alter the availability of punitive damages to varying degrees.
Essentially, where punitive damages are assessed, the wrongdoer must have acted in such a way that punishment beyond compensatory damages is appropriate. Typically, that punishment is meted out because of the direct acts of the insurer in handling the underlying claim or because of the acts of its employees and agents, which subject the insurer to vicarious liability for those wrongful acts. Whether one may insure against punitive damages is a question of public policy. The majority of the states allow parties to insure against punitive damage awards. In those states, reinsurability of punitive damages is not an issue as long as the reinsurance contract has an ECO clause or other coverage provision broad enough to encompass punitive damages.