Coverage Analysis
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The public policy of California, as codified in Section 533 of the Insurance Code, bars coverage for punitive damages. PPG Industries, Inc. v. Transamerica Ins. Co., 20 Cal. 4th  310, 975 P.2d 652 (1999)  See also  Certain Underwriters at Lloyds v. Pacific Southwest Airlines, 786 F.Supp. 867 (C.D. Cal. 1992)(rejecting insured's contention that coverage should be permitted where damages are based on vicarious liability for acts of predecessor).  See also City Products Corp. v. Globe Indemnity Co., 88 Cal. App.3d 31, 42 (1979).  In PPG, the California Supreme Court declared that ďan insured may not shift to its insurance company, and ultimately to the public, the payment of punitive damages awarded in the third party lawsuit against the insured as a result of the insured's intentional, morally blameworthy behavior against the third party.  To allow such recovery would (1) violate the public policy against permitting liability for intentional wrongdoing to be offset or reduced by the negligence of another; (2) defeat the purpose of punitive damages which are to punish and deter the wrongdoer; and (3) violate the public policy against indemnification for punitive damages."   

While it is therefore clear that an insurer is prohibited from indemnifying an insured for an award of punitive damages, not all courts have found that the insurer is similarly relieved from defending such claims.  The Appellate Court of Illinois has suggested that California's public policy would not be diluted by required an insurer to defend claims for punitive damages.  Society of Mt. Carmel v. National Ben Franklin Ins. Co., 1997 WL 366097 (1st Dist. June 30, 1997).
The California Court of Appeal ruled in Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., 14 Cal. App. 4th 637, 17 Cal. Rptr.2d 713 (1993) that the availability of coverage for punitive damages depends on the substantive law of the jurisdiction in which the damages are awarded.

Punitive damages may only be awarded against an insurer for "despicable" conduct. Mock v. Michigan Millers Mutual Ins. Co., 4 Cal. App. 4th 306, 5 Cal. Rptr.2d 594 (2d Dist. 1992).

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