Admiralty Law May Not Preempt State Law Claims For Punitive Damages Or Attorney’s Fees
March, 2004
In a bow to the states’ regulation of insurance companies, the United States District Court for the District of Maryland recently held in a breach of insurance contract case that admiralty law does not preempt state law claims for punitive damages or attorney’s fees. Carney Family Inv. Trust v. Ins. Co. of N. Am., 296 F. Supp. 2d 629 (D. Md.).
Facts
In Carney, a fire aboard a yacht owned by the plaintiff and insured by the defendant caused more than $1 million in property damage. The plaintiff refused the insurer’s settlement offer and filed a declaratory judgment action in federal court, alleging claims for breach of contract, actual and enhanced damages, and attorney’s fees. The plaintiff’s claims were brought under Massachusetts’ law against unfair-claims-settlement practices. The defendant moved to dismiss the plaintiff’s claims for punitive damages and attorney’s fees, arguing that admiralty law, not Massachusetts law, applied.
Analysis
The parties agreed that admiralty law governs disputes over marine insurance contracts. But the court recognized that the states share regulatory power with the federal government, especially in regard to insurance companies, where the states’ regulatory power “has always been particularly broad.” The court also reasoned that the regulation of marine insurance is best left to the states, considering “the lengthy history of state regulation of the insurance industry.”
After examining the authorities cited, the court concluded that the “weight of authority, which is consistent with the court’s view, finds that state law should provide the governing rules” in bad faith actions. Because there was no Fourth Circuit law directly on point, the court turned to applicable state law and concluded that the claims for punitive damages and attorney’s fees were permissible.
Learning Point:
In federal court, when matters of first impression arise relating to insurance questions, the court will often turn to the relevant state’s insurance law for guidance. The implications of the court’s decision therefore go far beyond punitive damages and attorney’s fees. ¨
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