Zurich Ins. Co. v. Shearson Lehman Hutton, Inc.

• Decision Date: 25 October 1994
• Citation: 642 N.E.2d 1065,618 N.Y.S.2d 609,84 N.Y.2d 309
• Parties: , 642 N.E.2d 1065 ZURICH INSURANCE COMPANY, Respondent, v. SHEARSON LEHMAN HUTTON, INC., Formerly Known as Shearson Lehman Brothers, Inc., Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 609

618 N.Y.S.2d 609

84 N.Y.2d 309, 642 N.E.2d 1065

ZURICH INSURANCE COMPANY, Respondent, v. SHEARSON LEHMAN HUTTON, INC., Formerly Known as Shearson

Lehman Brothers, Inc., Appellant.

Court of Appeals of New York.

Oct. 25, 1994.

McCormick, Fitzpatrick & Mertz, P.C. (Gregory S. Mertz, Keith J. Kasper and Michael J. Straub, of the Vermont Bar, admitted pro hac vice, of counsel), and Jacobson & Triggs, New York City, for appellant.

Siff Rosen, P.C., New York City (Ignatius John Melito and S. Dwight Stephens, of counsel), for respondent.

OPINION OF THE COURT

SIMONS, Judge.

This is a declaratory judgment action instituted by plaintiff insurer seeking a determination that it had no duty to indemnify its insured for punitive damages awarded against the insured in two separate out-of-State slander actions. The question is whether New York's public policy precluding indemnification for punitive damages should prevail over the public policies of the judgment States, which allow indemnification.

The action originally encompassed five separate underlying personal injury suits. Three have been resolved. In the first of the two remaining actions, Alexander Simon, the business manager for the actor Burt Reynolds, decided to close the Reynolds account with Shearson because of heavy losses. The Shearson broker then forged Simon's name to a letter authorizing payment of the funds from that account to Simon's family and friends. After two senior Shearson executives informed Reynolds of the letter, Reynolds terminated his relationship with Simon. Simon then brought suit in Federal District Court in Georgia for negligence, fraud and slander. He prevailed on the fraud and slander claims, recovering both general and punitive damages, but the District Court set aside the award. On review, the Eleventh Circuit Court of Appeals reinstated the damages awarded on the slander claim when Simon agreed to accept a reduced amount (see, Simon v. Shearson Lehman Bros., 895 F.2d 1304).

In the second action, Stuart Tucker was dismissed as a Shearson broker for selling limited partnerships without prior approval. In an attempt to retain Tucker's clients for the brokerage, a Shearson senior vice-president informed them that the Securities and Exchange Commission was going to take away Tucker's broker's license, and that he would never be able to work again as a broker. Tucker successfully sued for slander in Texas District Court, winning both compensatory and punitive damages. The Texas Court of Appeals affirmed.

Under the standard general comprehensive liability policy issued to Shearson, Zurich Insurance agreed to pay "all sums" Shearson might become legally obligated to pay as damages in a personal injury action. The policy specifically included an action for slander and contained no choice of law provision. When damages were awarded against Shearson in the out-of-State slander actions, Shearson sought indemnification from its carrier for both the compensatory and punitive damages awarded. In turn, Zurich brought this declaratory judgment action seeking a declaration that it had no duty to provide coverage for the punitive damage awards, because New York law precludes indemnification for punitive damages. ¹

On Zurich's motion for summary judgment, Supreme Court ruled that under this Court's holding in Home Ins. Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 551 N.Y.S.2d 481, 550 N.E.2d 930, New York's policy against indemnification for punitive damages would apply even though the punitive damages were incurred in a foreign State. However, the court concluded that New York's policy would preclude indemnification only for the Georgia award, although the conduct in both underlying personal injury actions would support an award of punitive damages in New York. Because Texas law recognized a compensatory component to a punitive damages award, the court reasoned, the award was not solely for punitive purposes and thus did not offend New York's policy. On cross appeals by both parties, the Appellate Division held that indemnification for the Texas award should be precluded as well, because the jury there had been charged only on the exemplary purposes of punitive damages, and there was no indication that the award included any compensatory elements. Notably, in both cases the Appellate Division relied on Home Ins. for the proposition that New York policy concerning indemnification for punitive damages applied to punitive damages awarded in a foreign State against a New York insured. There is an important contextual distinction between this case and Home Ins., however: in Home Ins., the public policy of the judgment State, like that of New York, precluded indemnification for punitive damages, while here the judgment States permit it. Thus, this case presents a choice of law issue not present in, or decided by, Home Ins.

We conclude that New York choice of law principles require application of New York's public policy. However, that public policy would not, under the circumstances of this case, preclude indemnification for the punitive damages awarded in the underlying action in the State of Georgia, only for those awarded in the action in the State of Texas.

Shearson attempts first to remove this case from the Home Ins. universe entirely by arguing that the tortious conduct in the underlying personal injury actions would not support an award of punitive damages in New York. Under Home Ins. this is a necessary threshold determination for if the damages awarded would not be "punitive" under New York law, indemnification would not be precluded by New York public policy. In that case there would be no conflict between New York and the judgment States concerning indemnification and the choice of law problem central to this appeal would not arise.

Addressing the Georgia judgment, Shearson points out that in that action it was necessary to resort to extrinsic evidence to establish that the statements at issue constituted slander per se. Under New York law, if slander per se is established by extrinsic evidence, the plaintiff must plead and prove special damages as an element of the claim, or recovery is barred (see, Aronson v. Wiersma, 65 N.Y.2d 592, 493 N.Y.S.2d 1006, 483 N.E.2d 1138). Because Simon, the Georgia plaintiff, did not plead and prove special damages (California law did not require it), ² Shearson argues that his recovery would be barred in New York and thus the conduct at issue would not support an award of punitive damages in this State. Shearson has failed, however, to distinguish between the conduct and the method of its proof.

In Home Ins., we stated that a New York court "must examine the nature of the claim, including the degree of wrongfulness for which the damages were awarded" (75 N.Y.2d, at 201, 551 N.Y.S.2d 481, 550 N.E.2d 930). We meant by this that the court must ascertain whether the conduct at issue exhibits the degree of culpability necessary to sustain a punitive award in New York, not whether the form of evidence or the method of proof acceptable to the judgment State would be sufficient in New York. Home Ins. in fact precludes the New York court from undertaking collateral review of the factual determinations or the legitimacy of the proceedings of the judgment State as part of its determination whether to apply New York's policy on punitive damages. The Georgia court found the statement at issue was made with "actual malice", which satisfies New York's legal standard for slander, and thus the conduct in the Georgia action would support a New York punitive damage award.

The rule in Home Ins. similarly disposes of Shearson's argument that Tucker, the plaintiff in the Texas action, would not have prevailed in New York because the Shearson executive who uttered the slanderous statements was not sufficiently highly placed to establish the necessary level of corporate complicity. The Texas Court of Appeals affirmed that the standard for corporate liability under Texas law was satisfied, and under Home Ins. New York will not undertake collateral review of a sister State's application of its own law. Because the Texas jury found the statements had been made with "actual malice", the standard of culpability to support a New York punitive award is met here as well.

Shearson next argues that because the concept of punitive damages under Georgia and Texas law differs so fundamentally from that of New York, New York's public policy would not be offended by indemnification. Thus, it contends that indemnification for the Georgia award should be permitted because it is impossible to determine whether the jury awarding punitive damages contemplated an exemplary or a compensatory purpose, or indeed both, and that Shearson should accordingly be afforded the benefits of "the presumption of coverage".

We have consistently adhered to the view that the purpose of punitive damages is solely to punish the offender and to deter similar conduct on the part of others (see, Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 613 N.Y.S.2d 352, 635 N.E.2d 1222; Hartford Acc. & Indem. Co. v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 397 N.E.2d 737). Punitive damages are not intended to compensate or reimburse the plaintiff (see, Home Ins. Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 551 N.Y.S.2d 481, 550 N.E.2d 930, supra ). However, under the Georgia statute in effect at the time of the Simon action (Ga Code Annot § 51-12-5[a], a jury in a tort action with "aggravating circumstances" could award "additional damages to deter the wrongdoer * * * or as compensation for the wounded feelings of the plaintiff". ³ The trial court indicated at the charge conference that her charge on punitive damages would track this statutory language. Inasmuch as the court charged the jury that the punitive damage award could include both punitive and compensatory elements and there was evidence to support each, the plaintiff must...