American Surety Company of New York v. Gold

• Decision Date: 18 May 1967
• Docket Number: No. 8225.,8225.
• Parties: AMERICAN SURETY COMPANY OF NEW YORK, Appellant, v. Harvey S. GOLD and Earl O. Dearmore, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

375 F.2d 523 (1966)

AMERICAN SURETY COMPANY OF NEW YORK, Appellant, v. Harvey S. GOLD and Earl O. Dearmore, Appellees.

No. 8225.

United States Court of Appeals Tenth Circuit.

September 29, 1966.

Rehearing Denied May 18, 1967.

H. E. Jones, Wichita, Kan. (A. W. Hershberger, Richard Jones, Wm. P. Thompson, Jerome E. Jones, Robert J. Roth, William R. Smith, Robert J. O'Connor, Wichita, Kan., with him on brief), for appellant.

Davis S. Carson, Wichita, Kan. (Clarence R. Sowers, John W. Sowers, James P. Johnston, Wichita, Kan., with him on brief), for appellee Harvey S. Gold.

G. Leroy Warner, Wichita, Kan. (Laurence S. Holmes, T. L. O'Hara, Wichita, Kan., with him on brief), for appellee Earl O. Dearmore.

Before MURRAH, Chief Judge, PHILLIPS and HILL, Circuit Judges.

MURRAH, Chief Judge.

This garnishment proceedings brings squarely to issue the question of an insurer's liability in the state of Kansas for a punitive damage judgment on a jury verdict against its insured.

The policy bound the American Surety Company of New York

"To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of:

"A. bodily injury, sickness or disease * * *

"B. injury to or destruction of property * * *

"arising out of the ownership, maintenance or use of the owned automobile or any non-owned automobile, and the company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy * * *."

In a personal injury suit in the Kansas federal court appellee Harvey Gold recovered a judgment against the insured-appellee Earl Dearmore in the amount of $841.54 for compensatory damage and $10,000 punitive or exemplary damage based upon an allegation of his gross and wanton negligence in the operation of an automobile.

The company acknowledged liability for compensatory damages, but denied any liability for the punitive damages on the grounds (1) that punitive damages were not within the coverage of the policy, and (2) if so, the contract insures against damages levied to punish and deter and, as such, is contrary to the public policy of the state of Kansas, hence unenforceable. American Surety appeals from the garnishment judgment for the full amount of the negligence judgment.

On the issues involved the trial court reasoned that since the policy did not expressly exclude liability for punitive damages and made no distinction between kinds of damages to be covered, the contract was at most ambiguous and should, therefore, be construed in favor of the insured to spell coverage. The court further reasoned that "The trend of decisions indicates clearly * * * that it is not against public policy to insure against punitive damages. It has been done in a good many jurisdictions."

Kansas has not directly spoken on either of the points involved, and we are under the necessity of forecasting what the Kansas court will say when it does speak. There is a sharp division of respectable authority on both points. On the coverage question the sister states of Missouri and Colorado have denied coverage under indistinguishably similar policies for the reason that such policies cover only damages for bodily injury and property damage, and punitive damages being for punishment and deterrence are not within that category. Crull v. Gleb, Mo.App., 382 S.W.2d 17; Universal Indemnity Co. v. Tenery, 96 Colo. 10, 39 P.2d 776. On the other hand, the Tennessee, South Carolina and other courts have found coverage on the ground that the language "all sums which the insured shall become legally obligated to pay because of bodily injury or property damage" on its face covers punitive damages, and that a reasonable person in the position of the insured would so construe his policy. Lazenby v. Universal Underwriters Insurance Company, Tenn., 383 S.W.2d 1, and cases cited; Carroway v. Johnson, 245 S.C. 200, 139 S.E.2d 908; 7 Appleman on Insurance § 4312, p. 129; 63 Col.L.R. 944.

Inasmuch as we are convinced from the weight and logic of the case law that Kansas would hold a policy insuring against punitive damage awards to be violative of the public policy of that state, we need not resolve the troublesome question of coverage. For the purposes of this case, we will assume that the policy does cover such awards.

With great respect we cannot agree with the distinguished trial judge that the trend of the decisions sanctions contracts of this kind as not against public policy although the case law may now be almost equally divided numerically.

The identical public policy question was presented to the Fifth Circuit under an identical policy involving the public policy of Florida and Virginia. The question was without precedent in both states. Judge Wisdom first went to the jugular vein of the question by an appraisal of the nature of punitive damages under Florida law. He found it to be in accordance with the general rule that punitive damages are assessed in addition to compensatory damages to punish and deter "when the wrong done partakes of a criminal character, though not punishable as an offense against the state * * *." Northwestern National Casualty Company v. McNulty, 307 F.2d 432, 435. After referring to the "few jurisdictions" which recognize punitive damages as compensatory, namely Connecticut, Michigan and New Hampshire, he proceeded to lay the major premise for the determination of public policy by reference to the proverb that "no one shall be permitted to take advantage of his own wrong." Id. 440 quoting Messersmith v. American Fidelity Co., 232 N.Y. 161, 133 N.E. 432, 19 A.L.R. 876. From this he reasoned that "the public policy against coverage is not so much to prevent encouragement of wrongdoing by obstructing the hopes of profit; it is rather to make effective the discouragement of wrong-doing by the imposition of punishment. 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." Id. 307 F.2d 440. He likened insurance against punitive damages to insurance against criminal fines or penalties which are undoubtedly violative of public policy and thus concluded that "The same public policy should invalidate any contract of insurance against the civil punishment that punitive damages represent." Id. 440. Finally he reasoned that if a person against whom punitive damages are assessed is permitted "to shift the burden to an insurance company, punitive damages would serve no useful purpose * * *" and in the end "Society would then be punishing itself for the wrong committed by the insured." Id. 440, 441. Judge Gewin, specially concurring, doubted whether the shifting of the responsibility for the penalty actually tended to encourage a reckless disregard for the safety of others on public highways.

The question next came before the Missouri Court of Appeals. That court adopted the reasoning in McNulty holding that "to allow a motorist to insure himself against judgments imposed against him for punitive damages, which were assessed against him for his wanton, reckless or willful acts, would be contrary to public policy. * * * If a person is able to insure himself against punishment, he gains a freedom inconsistent with the establishing of sanctions against such misconduct." Crull v. Gleb, 382 S.W.2d 17, 23.

About the same time the Tennessee court was treating the question quite differently and arriving at an entirely different result. That court in agreement with Judge Gewin could not agree that the closing of the insurance market on the payment of punitive damages would necessarily accomplish the result of deterring insureds from their reckless and wanton conduct. Moreover, to hold that as a matter of public policy the insured was not protected from a claim of punitive damages would have the effect of partially voiding the policy contract. Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1. There was also a strong concurring opinion by Mr. Justice White of the Tennessee court disagreeing with the reasoning in McNulty and suggesting that under McNulty, recovery on identical facts would depend upon the whim of the jury, i. e. whether the degree of culpability found by the jury fell on one side of the nebulous line separating gross and wanton negligence from ordinary negligence.

When the question came to the Florida court last year, that court had before it the reasoning and holding in McNulty, Crull and Lazenby. After quoting with approval from Judge Wisdom in McNulty, it tersely disposed of the question by simply saying that "We believe that a person has no right to expect the law to allow him to place responsibility for his reckless and wanton actions on someone else." Nicholson v. American Fire and Casualty Ins. Co., Fla.App., 177 So....