Under civil law, punitive damages are awarded when compensatory damages are deemed an inadequate remedy and where a defendant's actions can be interpreted as being willful, wanton, reckless or malicious. The unpredictable nature of large punitive damage awards and the accompanying publicity can cause significant damage to a corporation and its value to shareholders.
The unpredictable nature of punitive damage awards is complicated by a lack of uniformity among states as to the determination, treatment and even the insurability of punitive damage awards.
To solve this coverage dilemma, several U.S-based insurers have created "wrap" policies, issued by their Bermuda-based sister companies, that are designed to fill gaps created by inconsistent state regulation. The Bermuda-domiciled companies are able to respond to punitive damage awards in states where their domestic counterparts cannot.