Delaware Supreme Court Rules That Statutory Damages Are Not Excluded "Penalties"
03.30.15
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(Article from Insurance Law Alert, March 2015)
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The Delaware Supreme Court ruled that damages imposed against a policyholder pursuant to a Louisiana state statute were not excluded "penalties" under an errors and omissions policy. CorVel Corp. v. Homeland Ins. Co. of N.Y., 2015 WL 1021459 (Del. Mar. 6, 2015).
The coverage dispute arose out of allegations that CorVel, a "preferred provider organization," failed to comply with a Louisiana statute that required CorVel to give notice to a medical provider when a rate discount is to be applied. The statute allows the imposition of damages "double the fair market value of the medical services provided, but in no event less than the greater of fifty dollars per day of noncompliance or two thousand dollars, together with attorney fees to be determined by the court." La. R.S. § 40:2203.1(G). CorVel settled the underlying statutory claims and then sought coverage from Homeland Insurance Company. Homeland sought a declaration that it had no duty to indemnify the settlement because it constituted a "penalty" excluded by the policy. A Delaware trial court agreed and granted Homeland’s summary judgment motion. Shortly thereafter, a Louisiana trial court, faced with the same coverage dispute between CorVel and a different insurer, issued a contrary ruling, finding that the statutory damages were not penalties and therefore that the underlying settlement was covered under the applicable policy. A Louisiana appellate court affirmed. CorVel then appealed to the Delaware Supreme Court, arguing that under the principles of comity, Delaware law should defer to Louisiana’s interpretation of the statutory damages as non-penalties. The Delaware Supreme Court agreed.
The Delaware Supreme Court ruled that deference was warranted because the Louisiana appellate court "considered the same Louisiana statute and analyzed almost identical insurance policy language as that involved in this case." The Delaware Supreme Court found it irrelevant that the Delaware trial court had rendered its decision before the Louisiana trial court issued its ruling. The court also reasoned that the "center of this litigation" had been in Louisiana and that Delaware had "very little connection" to the litigation. Therefore, the court concluded that Louisiana law should govern interpretation of the Louisiana statute, notwithstanding the parties’ agreement to apply Delaware law to questions of policy interpretation. The dissenting opinion criticized the ruling, stating:
the dispositive question of law is what the contractual terms mean, which here the parties do not dispute is governed by Delaware, not Louisiana law. In other words, the issue is not what a state’s particular statute calls the remedy, or how that state’s courts would interpret the statute; the question is whether the remedy afforded by the statute in fact amounts to covered damages or excluded penalties as those terms are used in the parties’ contract.
As discussed in our June 2013 Alert, courts have similarly addressed whether other statutorily-imposed damages (e.g., Telephone Consumer Protection Act damages) are excluded penalties under liability policies.