The Insurability of Civil Fines and Penalties

In the last few decades, administrative regulation at both the federal and state levels has much more frequently than in the past deployed a distinctive weapon in its remedial arsenal: the imposition of a civil fine or penalty on actors who violate a regulatory dictate or prohibition. As the imposition of such civil fines and penalties has become more common, and as their magnitude increases, a new issue has begun to arise: whether insurance against liability for civil fines and penalties is permissible as a matter of public policy. Only a few jurisdictions have addressed the question at all thus far, and even these decisions do not have definitive breadth; they can easily be understood to leave a number of issues open. The Article characterizes the different sources of civil liability for regulatory fines and penalties, develops the criteria that should be relevant to the insurability of such liability, canvasses the sparse case law and statutory law that applies directly to the issue, and then examines the closest analogy to the issue – the insurability of liability for punitive damages -- exploring the ways that different states, with different rules governing the insurability of punitive damages, could address the insurability of liability for civil fines and penalties. Finally, the Article analyzes the different litigation contexts in which the insurability issue may arise, including the collateral effects that settlement of claims for, and assessment of, fines and penalties may have on policyholders’ coverage rights and insurers’ coverage defenses. My conclusion is that a contextual approach that would take into account the nature of the violation generating the civil fine or penalty, and the applicable state’s existing law on analogous issues (mainly the insurability of liability for punitive damages) is likely to be adopted. The result would be that liability for certain fines and penalties will be insurable, but that liability for others will not be.