## Facts

- An automobile liability policy with a $50,000 limit was issued in Virginia to Walter Scott Smith, a Virginia resident.
- In Florida, Smith—driving drunk at very high speed and weaving—rear-ended Edward A. McNulty’s vehicle while attempting an unsafe pass or after losing control.
- Smith fled the scene and was arrested miles away; McNulty suffered severe injuries, including permanent brain damage.
- McNulty sued Smith in Florida state court seeking compensatory and punitive damages.
- The insurer undertook Smith’s defense and warned generally of possible exposure beyond policy limits, but defense counsel did not tell Smith before trial that the insurer would disclaim payment of any punitive damages.
- A Florida jury returned a verdict against Smith awarding both compensatory and punitive damages.
- The insurer refused to indemnify for the punitive portion, asserting a public-policy bar to coverage for punitive damages.

## Issues

1. Whether an automobile liability insurer may be required to indemnify an insured for punitive damages imposed for the insured’s own gross or wanton misconduct.
2. Whether Florida or Virginia law governs the insurer’s obligation to cover punitive damages under a policy issued in Virginia for an accident and judgment in Florida.

## Decision

- The Fifth Circuit reversed the district court’s summary judgment to the extent it required the insurer to pay the punitive-damages award.
- The court held that Florida public policy prohibits insurance coverage for punitive damages imposed for the insured’s own gross misconduct in Florida.
- The insurer remained obligated to indemnify for the compensatory portion of the Florida judgment.
- The court indicated that Virginia policy would not necessarily bar such coverage, but Florida’s policy controlled as to punitive damages awarded by a Florida court for conduct in Florida.

## Legal Principles

- Punitive damages serve punishment and deterrence, not compensation; shifting them to an insurer undermines those purposes.
- Under Florida law as applied by the court, public policy bars liability insurance coverage for punitive damages assessed for the insured’s own gross, wanton, or willful misconduct.
- Compensatory damages for bodily injury are ordinarily indemnifiable under standard liability policy language and are not subject to the same public-policy restriction.
- In conflict-of-laws analysis for insurability of punitive damages, the forum may apply the policy of the state with the dominant interest in deterring the misconduct and enforcing the penal function of punitive awards.

## Conclusion

The Fifth Circuit held that, for a Florida punitive-damages judgment arising from egregious drunk driving in Florida, Florida public policy prevents an insurer from indemnifying the insured for punitive damages, though the insurer remains liable for compensatory damages under the policy.


Northwestern Nat'l Cas. Co. v. McNulty, 307 F.2d 432 (5th Cir. 1962)