Opinion ID: 2606350
Heading Depth: 1
Heading Rank: 5

Heading: insurance coverage for punitive damages

Text: As discussed above, the public policy against the insurability of punitive damages by a wrongdoer was first expressed in Koch v. Merchants Mutual Bonding Co., 211 Kan. 397, 507 P.2d 189 (1973). The policy was extended in Guarantee Abstract & Title Co. v. Interstate Fire & Cas. Co., 228 Kan. 532, 618 P.2d 1195 (1980). In that case, an employer argued that the policy did not apply in cases where an employer was assessed punitive damages vicariously. The court stated: [W]e reject such a rule, regardless of whether liability is incurred vicariously or directly. It is against the public policy of this state to allow a wrongdoer to purchase insurance to cover punitive damages [citation omitted], and we interpret that rule to include any person who has incurred such liability regardless of whether the liability resulted from the insured's own acts or those of his employee, servant or agent. 228 Kan. at 535. After Guarantee was decided, a bill involving insurance coverage for punitive damages was introduced in the Kansas House in 1983. The bill was enacted during the following legislative session and became K.S.A. 40-2,115. The legislative history of K.S.A. 40-2,115 demonstrates that it was enacted in reaction to our decision in Guarantee. K.S.A. 40-2,115(a) provides: It is not against the public policy of this state for a person or entity to obtain insurance covering liability for punitive or exemplary damages assessed against such insured as the result of acts or omissions, intentional or otherwise, of such insured's employees, agents or servants, or of any other person or entity for whose acts such insured shall be vicariously liable, without the actual prior knowledge of such insured. This statute was introduced prior to our decision in Kline v. Multi-Media Cablevision, Inc., 233 Kan. 988, 666 P.2d 711 (1983), but did not pass until after Kline was decided. The time line involved in the enactment of K.S.A. 40-2,115 is as follows: 2-24-83 Representative Vancrum testified regarding H.B. 2062 (a version of what was to become K.S.A. 40-2,115) that the bill was intended to very simply reverse the ruling in the Guarantee Abstract case. 7-15-83 Opinion in Kline v. Multi-Media Cablevision, Inc., 233 Kan. 988, 666 P.2d 711 (1983), announced. 2-24-84 Representative Vancrum again testified regarding H.B. 2876 (a version of what was to become K.S.A. 40-2,115): The bill would merely reverse the 1980 Supreme Court ruling in the Guarantee Abstract case. 4-26-84 Effective date of K.S.A. 40-2,115. The legislative history involving K.S.A. 40-2,115 does not mention or make reference to our decision in Kline. Kline involved the following certified question from the United States District Court for the District of Kansas: `Under Kansas law, may a corporation be held liable for punitive damages arising from an act of an agent or employee, within the scope of the agent's or employee's employment, when the corporation, through its board of directors or an officer, has neither directed, authorized nor ratified the act.' 233 Kan. at 989. The plaintiff in Kline urged this court to adopt a vicarious liability rule that a corporation be held liable for punitive damages whenever the employee, acting within the scope of employment, is liable. We considered the deterrence aspect of this rule and recognized that the vicarious liability rule was followed by a majority of the courts. 233 Kan. at 990. As a second possible answer to the certified question, we recognized what has been referred to as the complicity rule expressed in Restatement (Second) of Torts § 909 (1977). This rule basically provides that a corporation might be held liable for punitive damages resulting from acts of its employees only when it has directed or ratified those acts. 233 Kan. at 990. After a thorough discussion of the merits of each rule, we held: We hereby adopt the complicity rule set out in the Restatement (Second) of Torts § 909 (1977). Although couched in terms of master's and principal's liability for punitive damages arising out of acts of servants and agents, the rules are equally applicable to corporations. Thus we answer the certified question. A corporation is not liable for punitive damages for an employee's tortious acts committed within the scope of his employment unless (a) the corporation or its managerial agent authorized the doing and manner of the act; (b) the employee was unfit and the corporation or its managerial agent was reckless in employing or retaining him; (c) the employee was employed in a managerial capacity and was acting in the scope of employment; or (d) the corporation or its managerial agent ratified or approved the act of the employee. 233 Kan. at 994. The complicity rule has been followed by this court in Smith v. United Technologies, 240 Kan. 562, 731 P.2d 871 (1987) (upholding punitive damage award against corporation based upon acts by managerial personnel in the scope of their employment); Gould v. Taco Bell, 239 Kan. 564, 571, 722 P.2d 511 (1986) (defendant corporation held liable for punitive damages where managerial personnel's acts were wanton); and Plains Resources, Inc. v. Gable, 235 Kan. 580, 682 P.2d 653 (1984) (upholding award of punitive damages against corporation where corporate employer was liable for negligent hiring and also directed and ratified tortious acts of employee); see Southern American Ins. v. Gabbert-Jones, Inc., 13 Kan. App.2d 324, 769 P.2d 1194 (1989). In 1987, the Kansas Legislature partially adopted the complicity rule set forth in Kline. K.S.A. 60-3701. Under the provisions of K.S.A. 60-3701(d), the legislature provided: In no case shall exemplary or punitive damages be assessed pursuant to this section against: (1) a principal or employer for the acts of an agent or employee unless the questioned conduct was authorized or ratified by a person expressly empowered to do so on behalf of the principal or employer. While K.S.A. 60-3701 narrowed our holding in Kline by specifying that only under certain circumstances may punitive damages be assessed against an employer for the conduct of its employees, the statute partially expresses the complicity rule adopted by this court in Kline. K.S.A. 60-3701(d)(1) limits punitive damages assessed to an employer only in circumstances where the employer has ratified or authorized the act of the employee. Since our decision in Kline, the policy of Kansas regarding assessment of punitive damages against a corporation is that such damages may be assessed in accord with the complicity rule but not upon a vicarious liability rule. The enactment of K.S.A. 40-2,115, after our decision in Kline, permits the purchase of insurance for punitive damages under a vicarious liability rule. K.S.A. 40-2,115 was passed in reaction to Guarantee, 228 Kan. 532, but the legislature did not consider our decision in Kline. Kline controls from the date of the decision in 1983. Since K.S.A. 40-2,115 was passed in 1984 and was based upon a vicarious liability rule, the statute has no effect in Kansas in cases where punitive damages are awarded on the basis of the complicity rule expressed in Kline. K.S.A. 40-2,115(a) conflicts with our decision in Kline and also conflicts with the provisions of K.S.A. 60-3701(d) passed by the Kansas Legislature in 1987. In Kansas, a corporation may be held liabile for its own wanton acts. Flint Hills Rural Elec. Co-op Ass'n v. Federated Rural Elect. Ins. Corp., 262 Kan. 512, 941 P.2d 374 (1997); Cerretti v. Flint Hills Rural Electric Co-op Ass'n, 251 Kan. 347, 366, 837 P.2d 330 (1992). However, since our decision in Kline, and presently under the provisions of K.S.A. 60-3701(d), a corporation may not be held liable for the wanton acts of its employee unless under the complicity rule. There is no corporate employer liability under the complicity rule and K.S.A. 60-3701(d) unless the questioned conduct was authorized or ratified by a person expressly empowered to do so on behalf of the ... employer. K.S.A. 60-3701(d)(1). The provisions of K.S.A. 40-2,115(a) do not apply in this case. There remains in Kansas, under the facts of this case, a policy against insurance coverage for punitive damages. That policy is best expressed in St. Paul Surplus Lines Ins. Co. v. International Playtex, Inc., 245 Kan. 258, 273, 777 P.2d 1259 (1989): A finding that Kansas public policy does not apply to the punitive damages in the O'Gilvie action would effectively excuse [the corporate defendant] from the consequences of its reckless behavior within this state. Failure to apply Kansas law would establish an undesirable precedent for other tort and product liability action.... This would result in the uneven application of the public policy. Kansas tortfeasors would be required to feel the `pecuniary punch' while out-ofstate tortfeasors could require their `guiltless' insurance companies to pay such damages. Out-of-state tortfeasors who contracted with out-of-state carriers would, therefore, not be subject to deterrence for committing reckless acts in Kansas. The same Kansas policy also applies in the case of the driver, Printup: Where exemplary damages are awarded for purposes of punishment and deterrence, as is true in this state, public policy should require that payment rest ultimately as well as nominally on the party who committed the wrong; otherwise they would often serve no useful purpose. The objective to be attained in imposing punitive damages is to make the culprit feel the pecuniary punch, not his guiltless guarantor. Koch, 211 Kan. at 405. The awards in this case apply separately to the employer and employee. As we said in Smith v. Printup I, 254 Kan. 315, 356, 866 P.2d 985 (1993): Each wrongdoer is liable to pay the punitive damages assessed against him or her. The amount of the award is to be calculated with the individual defendant's financial status and conduct in mind.... Joint and several liability undermines these considerations and therefore is unavailable. Permitting insurance coverage of the punitive damages for Red Ball and Printup in this case would violate Kansas law and public policy. This is particularly true in the case of Red Ball wherein liability is based upon the complicity rule set forth in K.S.A. 60-3701(d)(1). We conclude that Hartford's insurance policy does not cover the punitive damage awards against Red Ball or Printup. Accordingly, we reverse the part of the trial court's judgment holding that Hartford is liable for punitive damages awarded against Red Ball. In all other respects, we affirm the decision of the trial court. Affirmed in part and reversed in part.