Illinois maintains a strong public policy prohibiting liability insurance for certain types of punitive damage awards. On June 11, 2021, in Ironshore Specialty Insurance Co. v. Akorn, Inc., the U.S. District Court for the Northern District of Illinois, Judge Matthew F. Kennelly presiding, ruled on the issue of insurability of a punitive damages award from a Georgia jury against an Illinois insured in a negligent failure to warn case.
The insured, Akorn, Inc., produced a drug called methylene blue. Akorn became aware through an FDA alert that methylene blue could cause serious injury in patients when taken in combination with serotonergic psychiatric medications. Since methylene blue was a "grandfathered" drug exempt from new FDA regulations, Akorn could choose whether to update methylene blue labels to warn of this risk. Apparently after internal deliberations, Akorn's Vice President for Regulatory Affairs decided not to update labelling of the drug to warn of the potential adverse interaction.
In 2013, Ann Pope underwent parathyroid surgery. Unaware of the interaction risk posed by the use of methylene blue and the serotonergic psychiatric medication Pope had taken, her surgeon used methylene blue during her surgery. Pope developed a severe form of serotonin syndrome and was placed into a medically induced coma, which left her with permanent disabling injuries, including cognitive impairment. Pope and her husband sued Akorn in Georgia, alleging that Akorn knowingly and intentionally withheld from patients information regarding the risk. In 2015, a jury found Akorn 100 percent liable, and awarded Pope and her husband compensatory damages and an additional $17.5 million in punitive damages based on Akorn's conscious indifference in negligently failing to warn of the adverse interaction potential.
After Akorn's primary insurer paid its $10 million policy, partially paying the punitive damages award, Akorn sought to recover from its excess carrier, Ironshore, the remaining punitive damages it paid to satisfy the judgment. Ironshore denied coverage for the punitive award and sued in Illinois federal court, arguing that punitive damages were not insurable under Illinois law (where the policy was procured) or alternatively that punitive damages were not covered by the policy.
The court held that the excess carrier was not required to indemnify Akorn and, accordingly, did not breach the policy. Illinois law can prohibit insurance for punitive damages for negligent/ unintentional conduct where that conduct results in a punitive award directly against the insured. Akorn's conscious choice not to warn of the interaction risks associated with methylene blue, the court held, was negligent and the kind of unintentional conduct that resulted in the punitive award.
The insured's conscious disregard for the safety of its drug's users in light of the FDA alert, while negligent, was sufficient grounds not only for the award of punitive damages but also for a finding that prohibited insurance for those damages. The court reiterated that the line prohibiting insurance for punitive awards was not between negligent and intentional conduct but between negligent conduct and the type of unintentional conduct that formed the basis of the punitive damages being awarded in the first place.
In reaching its conclusion, the court first addressed the threshold issue of whether the Ironshore policy was subject to Illinois law (where public policy prohibits the insurability of punitive damages) or Georgia law (where the opposite is true – public policy does not prohibit the insurability of punitive damages). In concluding that Illinois law applied, the court was moved to some degree by the fact that "Illinois has professed an interest in preventing Illinois insureds from taking advantage of their wrong by passing certain punitive damages [on to] their insurers." In the end, the court applied Illinois law because of that strong policy and the fact that the insured's central operations were in Illinois.
The court rejected the insured's argument that since Georgia law applied to the primary policy, it also must apply to the excess policy. The court rejected this argument, finding there was no court decision applying Georgia law to the primary policy. Any decision by the primary insurer to pay its limits to indemnify the insured for the punitive award was not an admission Georgia law applied, and the insured failed to explain why that insurer's policy interpretation should bind the excess insurer or constrain the court's conflict-of-laws analysis. Thus, the punitive damages payment by the primary carrier did not bind or constrain the excess carrier.
Regardless of where the punitive damages are originally awarded, the Illinois public policy bar on coverage for punitive damages can apply to even unintentional or negligent conduct so long as the conduct shows some level of conscious disregard for the safety of others. Moreover, a primary insurer's coverage decision does not bind or constrain an opposite coverage decision by the excess insurer.
As of 2018, all but four states allowed punitive damages to be awarded, but virtually all states require some element of intent, willfulness, wantonness, recklessness, fraud, malice, oppression, knowledge, conscious disregard or deceit. See Wilson Elser Punitive Damages Review: 50-State Survey at p. 2 (2018 update).Thus, the circumstances that would give rise to an award of punitive damages in response to unintentional conduct are few and far between – meaning that the circumstances in which Illinois law would allow insurance coverage for punitive damages are exceptional.
This article was prepared with assistance from Thomas K. Duff (Law Clerk – Chicago).
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