Policyholders are often told by their insurance carriers that their insurance policy does not cover statutory damages. Insurers are quite adept at characterizing statutory damage settlements and judgments in ways that avoid coverage. They may label damages as “restitution,” or treat them as “punitive” in nature. They may also argue that such damages constitute an allegedly uncovered “fine or penalty.” Yet, when insurance carriers are challenged on these denials, they are often proven wrong by the courts. See Navigators Ins. Co. v. Sterling Infosystems, Inc., Index No. 653024/2013, slip op. at 7 (N.Y. Sup. Ct., N.Y. County July 28, 2015) (“Navigators”).
The court in Navigators held the errors and omissions insurance policy covered statutory damages for willful violations, even though the policy excluded coverage for fines and penalties. In Navigators, it was alleged that the policyholder Sterling willfully violated the Fair Credit Reporting Act (FCRA) by providing false information to employers, who relied on that information to terminate the plaintiffs’ employment. Sterling sought coverage under its policy, which covered all sums that the insured became legally obligated to pay as damages, but excluded fines and penalties. The insurer, Navigators, denied coverage and contended that the damages sought under FCRA were excluded penalties. Sterling disagreed and contended that the damages sought were not penalties, but were compensatory in nature.
The court reasoned that resolution of the coverage dispute depended on the interpretation of FCRA. Under FCRA, a plaintiff can seek either its actual damages or statutory damages between $100 and $1000 per violation. In addition, a plaintiff can seek punitive damages. The court noted that the underlying plaintiffs sought only statutory damages for willful violations. The court stated that, depending on the statute, such statutory damages can be compensatory, punitive, or both. Under FCRA, the court found for three reasons “that the statutory damages function primarily as compensation.” Slip op. at 8. First, because “actual damages are compensatory, statutory damages that substitute only for those actual damages are also compensatory.” Id. Second, statutory damages under FCRA are designed to provide a remedy when actual damages are difficult to calculate. Finally, the court noted that the statute provided a separate remedy for punitive damages, so the other damages sought are more logically considered to be compensatory. The policy provided coverage because damages were compensatory in nature. Hence, they were not subject to the fines or penalties exclusion as Navigators contended.
The lesson is that policyholders should not accept insurance company coverage denials that are based on the improper labeling of damages. Rather, policyholders should conduct a thorough analysis of policy language and damages alleged, and fight for all of the coverage to which they are entitled.
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