Oklahoma Bar Journal

'Fines or Penalties' Exclusions in Professional Liability Policies

Possible Exclusion of Coverage for Discover or Other Sanctions Imposed Against an Insured During an Otherwise Covered Claim

By Andrew Jayne

Professional liability insurers have, with varying degrees of success, denied coverage for sanctions imposed against their insured under “fines or penalties” exclusions (FP exclusions) in professional liability policies. There are no Oklahoma or 10th Circuit cases discussing FP exclusions in the context of sanctions and scant case law from other jurisdictions addressing the issue. This article 1) explains FP exclusions in professional liability policies; 2) summarizes relevant case law from other jurisdictions; and 3) analyzes whether various types of discovery sanctions imposed pursuant to Section 3237 of the Oklahoma Discovery Code are likely to be excludable under an FP exclusion.

Oklahoma practitioners, insurers and insureds should be aware that, even if a professional negligence claim is covered by the policy, discovery sanctions imposed during the course of litigation may be excluded. If an insurer takes the position that a discovery or other sanction is a fine or penalty, the insured could end up individually paying a significant monetary sum for litigation sanctions. This could be an important consideration in advising both insureds and insurers during the course of any claim covered under a professional liability policy.


The types of professional liability insurance policies that commonly include an FP exclusion include: errors and omissions policies (referred to as E&O policies); policies covering liability of corporate directors and officers (referred to as D&O policies); malpractice policies; and other professional liability coverage forms which are part of a commercial package policy. FP exclusions sometimes appear as an expressly enumerated exclusion. Other times, the definition of “loss” or “damages” excludes coverage for “fines and penalties.” There are also slight variations in the wording of the exclusion. For instance, some policies exclude coverage for “fines or penalties” while others exclude coverage for “fines or penalties imposed by law.”

There is no case law addressing the application of FP exclusions when sanctions are imposed during the defense of an otherwise covered claim. However, there is some case law addressing FP exclusions where an insured has submitted a sanction to the professional liability carrier as a stand-alone claim. As explained below, those cases have developed a test which examines whether the sanction is punitive or compensatory in nature to determine whether it qualifies as a “fine or penalty,” and therefore whether it is excluded under the policy.


Three relevant decisions were issued in the early 1990s. In Wellcome v. Home Insurance Co., a Montana Supreme Court decision, an attorney had previously been sanctioned for violating a motion in limine ruling during closing arguments.1 The attorney sought coverage for the sanction from his malpractice carrier. The policy excluded from the definition of “damages” any “fines or statutory penalties imposed by law or otherwise.”2 The insurer denied the claim on the basis that the sanction was a “fine” and therefore excluded from the definition of covered “damages.” The attorney argued that the term “fine” in the policy was limited to criminal fines or penalties and that sanctions are not fines, penalties or any other type of punishment.3 In rejecting the insured’s argument, the Wellcome court relied on Black’s Law Dictionary and explained that “a fine is a pecuniary punishment, and that this meaning is clear and well understood.”4 The court found that the exclusion was not ambiguous and that it was an enforceable exclusion under the policy.5

In O’Connell v. Home Insurance Company, the insurer denied defense and indemnity for Rule 11 sanctions previously imposed against three attorneys (its insureds), for filing a frivolous lawsuit.6The insurer took the position that Rule 11 sanctions were “fines or penalties whether imposed by law or otherwise,” and therefore excluded from the policy’s definition of damages.7 The District Court for the District of Columbia held that the policy was ambiguous as to whether it excluded coverage because not all Rule 11 sanctions “are meant to be punitive, or should be construed as a fine or penalty.”8 Construing the ambiguity in favor of the insured, the court held that the policy covered all costs arising out of the Rule 11 sanction.9

The North Carolina Supreme Court, in Collins & Aikman Corp. v. Hartford Accident & Indemnity Co., considered whether an award of punitive damages against an insured trucking company could be excluded under an FP exclusion.10 The insurer had denied the claim for punitive damages because the policy provided that “damages” did not include fines or penalties. The Collins court rejected that argument, and held that the term “penalty” was ambiguous as to whether it included punitive damages, and ultimately construed the provision in favor of the insured.11

In 1999, the United States Court of Appeals for the 3rd Circuit became the first and only federal circuit court to extensively examine an FP exclusion in Carey v. Employers Mutual Casualty Company.12 The plaintiffs in Carey were three former supervisors (supervisors) of Berwick Township, Pa. (township). In the early 1990s, township entered into a contract whereby it would pay Berwick Enterprise certain costs associated with an irrigation system. Berwick Enterprises built the irrigation system and submitted a bill to township. Supervisors determined how much Berwick Enterprises was to be reimbursed and authorized payment. Ultimately, township’s Audit Committee concluded that supervisors drastically overpaid Berwick Enterprises and issued a surcharge against supervisors for the difference of what should have been paid and what was actually paid to Berwick Enterprises.13

Supervisors sought coverage of the surcharge from Employers Mutual Casualty Company (employers mutual) under an E&O policy purchased by township. Employers mutual denied the claim on multiple grounds, including that the surcharge was a “fine or penalty imposed by law” and therefore excluded from coverage. The district court granted summary judgment in favor of employers mutual, holding that there was no coverage for defense or indemnity because the surcharge was a fine or penalty imposed by law.14 Supervisors appealed to the 3rd Circuit Court of Appeals, arguing that an exclusion for a “fine or penalty imposed by law” is an ambiguous provision that must be construed in their favor.15

The 3rd Circuit initially noted the lack of case law addressing the scope of FP exclusions.16 The Carey court reviewed various early cases, including Wellcome and Collins explained above. The court also examined cases involving administratively imposed sanctions, noting that such courts had typically “looked to the nature of the sanction in determining whether the policy excludes coverage.”17 The Carey court discussed two specific administrative sanction cases that warrant discussion. First, the court discussed an IRS tax penalty case, St. Paul Fire & Marine Insurance Co. v. Briggs, wherein the IRS sought to recover amounts owed by an employer for unpaid withholding tax from two individual officers of the company.18 A provision in the tax code allows for recovery of amounts owed by a company in withholding tax from an individual as a “penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”19 The individual officers made a claim under a D&O policy issued by St. Paul. St. Paul denied the claim, asserting the exclusion for “fines or penalties or other losses deemed uninsurable by law.”20 The Briggs court, however, found in favor of the insured in holding that the provision providing for individual tax liability was not a “penalty” within the meaning of the exclusion because the penalty was not punitive in nature.21

The Carey court also examined Hofoc Inc. v. National Union Fire Insurance Co., wherein an Iowa court concluded that a provision of the federal tax code imposing liability for improper dealings with an ERISA pension plan, would constitute a “fine or penalty” for purposes of insurance coverage.22The policy in the Hofoc case excluded fines and penalties from the term “loss.” The court found that the policy did not cover a 5 percent excise tax imposed by the IRS because the term “penalty” in the policy, though undefined, was not ambiguous.23 In so holding, the Hofoc court relied on Black’s Law Dictionary to define penalty as “money that the law exacts as punishment for either doing a prohibited act or not doing a required act.”24 The court found that the excise tax was a penalty because it was designed to “shift the sanction for violation of the prohibited transaction provision from the trust or plan to the parties.”25

After a thorough review of the above case law, the Carey court concluded:

The available case law suggests that an exclusion for fines and penalties, where those terms are undefined in the policy, allows an insurer to deny coverage when the item to be covered is punitive, rather than compensatory.26

Analyzing the nature of the surcharge, the Carey court found it to be compensatory in nature. The court reasoned that Pennsylvania appellate courts had, on at least two occasions, sustained dismissals for a surcharge because township failed to show it sustained a financial loss, “thereby signifying that the purpose of the surcharge is to compensate for loss suffered.”27

Ultimately, the Carey court held that the policy was ambiguous regarding coverage for the surcharge because it was susceptible to more than one interpretation. In finding the provision ambiguous, the Carey court reasoned that the policy did not define “fine” or “penalty,” and that an FP exclusion may be raised in a wide variety of situations, not all of which would be excluded under the language of the policy. Therefore, construing the ambiguity in favor of the insured, the surcharge was covered by the policy.28

Most recently, in 2013, the U.S. District Court for the District of Montana analyzed an FP exclusion as it applied to a contempt citation. In Animal Foundation of Great Falls v. Philadelphia Indemnity Insurance Co., the court considered whether a provision in a D&O policy which provided that “‘[l]oss’ does not include criminal or civil fines or penalties imposed by law,” excluded coverage for sanctions assessed through a contempt citation.29

In that case, the Animal Foundation and one of its trustees received a subpoena to appear for a deposition and produce documents. While the trustee appeared for the deposition, the trustee and the Animal Foundation failed to produce documents in response to the subpoena. Thereafter, the court found the Animal Foundation in contempt for failing to produce the documents, but further ordered that the contempt could be remedied by production of the documents without redaction. In response, the Animal Foundation and the trustee, upon the advice of their counsel, produced the documents redacted. The court found the Animal Foundation, the trustee and the attorney in contempt of court and ultimately awarded significant attorneys’ fees and costs pursuant to Mont. R. Civ. P. 37(a).30

The Animal Foundation submitted the contempt award to its D&O carrier, Philadelphia Indemnity Insurance Company. Philadelphia Indemnity denied the claim, contending, among other things, that the matter is not a “[l]oss” under the policy because the definition of “[l]oss” in the policy did not include “criminal or civil fines or penalties imposed by law.”31

The Animal Foundation court first rejected Philadelphia Indemnity’s argument that the contempt proceedings did not fall within the policy’s definition of a claim.32 The court next examined whether the contempt proceedings met the definition of “[l]oss” in the policy, which excluded criminal or civil fines or penalties imposed by law. The court adopted the analysis in Wellcome and inquired as to whether the sanction was punitive or compensatory as the test for determining whether the sanction was excluded.33 The court concluded that contempt sanctions imposed through the Montana Rules of Civil Procedure were a statutory penalty imposed by law and coverage for the contempt citation was therefore excluded under the policy.34

Interestingly, after concluding the policy excluded indemnity coverage for the fine itself, the court examined whether there was coverage for costs of defending against the contempt citation. Based on Montana’s broad duty to defend, and the language in the policy, the court concluded that while there was no indemnity coverage for the contempt citation, Philadelphia Indemnity did have a duty to pay the costs of defending the contempt citation.35


While some courts have found FP exclusions to be ambiguous in specific contexts, no courts have not found the exclusion facially ambiguous or invalid. Instead, courts have examined the particular penalty or sanction at issue to determine whether it is more punitive or compensatory in nature. If punitive, courts tend to find the exclusion valid and rule in favor of the insurer. If the sanction is more compensatory in nature, courts tend to find the exclusion ambiguous and rule in favor of the insured.

Although not addressed in case law, an FP exclusion could come into play during the course of litigating an otherwise covered claim. If an Oklahoma court imposes sanctions or an award of attorneys’ fees and costs to a prevailing party in a discovery dispute pursuant to Section 3237 of the Oklahoma Discovery Code, an insurer could potentially try to deny coverage for that portion of the claim.36

There are numerous bases upon which an Oklahoma court can impose sanctions under Section 3237. Based on the case law above, in examining whether a sanction levied under Section 3237 is excluded under a FP exclusion, courts will likely consider the nature of the sanction to determine whether it is punitive or compensatory and whether it therefore qualifies as an excluded “fine or penalty.”

A sanction or award under Section 3237(A)(4) may be considered compensatory rather than punitive. Paragraph (A)(4) of Section 3237 provides that the court “shall” award the prevailing party on a motion to compel discovery reasonable expenses, including attorneys’ fees, unless the making of the motion or opposition to the motion is substantially justified or other circumstances make the award unjust.37 This provision is somewhat akin to a prevailing party fee-shifting statute. A strong argument could be made that an award of attorneys’ fees and costs under this provision is to compensate the prevailing party rather than to punish the party that lost the discovery motion. However, the particular facts relating to the sanctions could change this analysis. Further, one could argue that the language giving the court an option not to shift fees and costs if there is a “substantial justification” for the discovery position or if it would be “unjust,” indicates that sanctions under this provision are punitive in nature.

In contrast, certain sanctions authorized under Section 3237(B), on their face, seem more punitive in nature. For instance, Section 3237(B)(1) provides that a deponent may be held in contempt of court for failing to answer deposition questions after being ordered by the court to do so.38 Section 3237(B)(2) authorizes the court to find parties or others in contempt of court for failing to obey court orders, and it also allows for the award of attorneys’ fees and costs to remedy the contempt.39Finally, Section 3237(E) authorizes sanctions, including attorneys’ fees and costs, for failure of a party to attend a noticed deposition, failure to answer interrogatories or failure to respond to a request for an inspection.40

An argument could be made that these sanctions under Section 3237(B)&(E) are more punitive than sanctions under Section 3237(A) because they go beyond fee shifting to a prevailing party. These sanctions are based on contempt of court, and they appear to require more intentional conduct. It appears that an insurance carrier would have a better argument that sanctions under Section 3237(B) or (E) are punitive in nature, and therefore, an FP exclusion applies. Case law indicates that the particular facts surrounding the sanction will be relevant to the analysis.

Even if coverage exists under a professional liability policy, an FP exclusion may exclude coverage for certain sanctions imposed during the course of litigating the claim, including certain sanctions under Section 3237 of the Oklahoma Discovery Code. Oklahoma federal and state courts will likely analyze the sanction under the “punitive versus compensatory” rubric to determine if the FP exclusion applies. Practitioners and insurers should keep this in mind and make sure their insureds are appropriately counseled and advised prior to the imposition of any discovery sanction.

Andrew Jayne is a partner at Baum Glass & Jayne PLLC. His practice focuses on first- and third-party insurance litigation, insurance coverage litigation and commercial litigation.

1. 849 P.2d 190 (Mont. 1993). Wellcome answered a question certified by the 9th Circuit Court of Appeals in the underlying case. 
2. Id. at 192.
3. Id. at 193.
4. Id. 
5. Id. at 194. 
6. No. 88-3523, 1990 WL 137386 (D.D.C. 1990).
7. Id. at *14.
8. Id. at *15.
9. Id. at *16. 
10. 436 S.E.2d 243 (N.C. 1993).
11. Id. at 247. The FP exclusion likely would not be an issue with respect to a punitive damages award in jurisdictions such as Oklahoma which prohibit insurance coverage for punitive damages, except in very limited circumstances, as a matter of public policy. See Dayton Hudson Corp. v. Am. Mut. Liab. Ins. Co., 621 P.2d 1155 (Okla. 1980).
12. 189 F.3d 414 (3rd Cir. 1999).
13. Id. at 415-16.
14. Id. at 417. Because the district court found that there was no coverage because the surcharge was a fine or penalty, it declined to address the other two policy exclusions relied upon by Employers Mutual. Id.
15. Id. Pennsylvania, like Oklahoma, requires that the court construe an ambiguous policy provision against the insurer and in favor of the insured. Compare id. at 417 (citing Pennsylvania Dep’t of Transp. v. Semanderes, 531 A.2d 815, 818 (Pa. Commw. Ct. 1987), with Max True Plastering Co. v. United States Fid. & Guar. Co., 912 P.2d 861, 869-870 (Okla. 1996). 
16. Carey, 189 F.3d at 417.
17. Id. at 418.
18. 464 N.W.2d 535 (Minn. Ct. App. 1991).
19. Carey, 189 F.3d at 418 (quoting Briggs, 464 N.W.2d at 537). 
20. Id.
21. Carey, 189 F.3d at 418 (citing Briggs, 464 N.W.2d at 539). However, the Briggs court went on to conclude that allowing insurance to cover nonpayment of taxes would contravene public policy and held that the insurer had no duty to defend or indemnify. Briggs, 464 N.W.2d at 539. 
22. 482 N.W.2d 397 (Iowa 1992).
23. Carey, 189 F.3d at 419 (citing Hofco, 482 N.W.2d at 402).
24. Id. (citing Hofco, 428 N.W.2d at 402). 
25. Id. (quoting Hofco, 482 N.W.2d at 402).
26. Id. 
27. Id. at 420.
28. Carey, 189 F.3d at 420-21.
29. No. CV 13-30-GF-DLC-JCL, 2013 WL 12141485, *26 (D. Mont. Nov. 22, 2013). 
30. Id. at *2-7.
31. Id. at *5, *12-13.
32. Id. at *10-11.
33. Id. at *13-16.
34. Id. at *20-22.
35. Animal Found., 2013 WL 12141485 at *28-29.
36. Okla. Stat. tit. 12 §3237.
37. Id. §3237(A)(4).
38. Id. §3237(B)(1).
39. Id. §3237(B)(2).
40. Id. §3237(E).

Originally published in the Oklahoma Bar Journal -- OBJ 88 pg. 1965 (Oct. 21, 2017)