WASHINGTON--A provision tucked into a bill in the Senate yesterday could significantly increase insurers' costs stemming from punitive damage awards in civil suits.

Its language, which would affect carriers both as insurers providing legal protection and as legal targets themselves, was part of minimum wage legislation that was cleared for floor action.

The punitive damage provisions would prohibit companies from deducting punitive damages from their taxes.

The U.S. Chamber of Commerce sees the provisions as so irksome it is mounting a full court press against them, marshaling 19 associations representing business and industry into a group calling itself the "Working Group for Certainty in Settlements."

A lobbyist for a major law firm who asked that his name not be used said the provision is "creating some consternation in the business community."

He added that the Financial Services Roundtable is talking to the staff of Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, "about the potential implications here."

The lobbyist and a staff official at the Chamber also said one concern is that even if the punitive damages provisions are removed from the minimum wage bill, they could surface in other legislation.

Both sources pointed out the provisions had been included in tax reconciliation legislation passed by the Senate in 2005, but later removed.

The punitive damage language, designed as a revenue raiser, is among tax provisions added Jan. 17 by the Senate Finance Committee to the bare-bones minimum wage bill passed earlier in the month by the House.

The Senate voted 87-10 at 11:10 a.m. to limit debate on the measure, S-2, clearing the way for passage by the full Senate later this week.

At the same time, inclusion of the tax provisions sets up a battle with the House, whose Democratic leadership is insisting on a clean minimum wage bill.

Among the implications of the provisions are that it could serve to give plaintiffs' attorneys more leverage to force large settlements, according to Mark Behrens, a lawyer with Shook, Hardy & Bacon in Washington, D.C.

That would occur because if the defendant went to trial and lost, he could be socked for punitive damages that would not be deductible, he said.

The more favorable option would be to accept a larger settlement that a plaintiff would agree to describe as compensatory and therefore deductible, he said.

The provision, in addition to barring a deduction for punitive damages, also says that "if the liability for punitive damages is covered by insurance, any such punitive damages paid by the insurer are included in gross income of the insured [company] and the insurer is required to report such amounts to both the insured person and the IRS."

Mr. Behrens said the notification provision will have a lesser impact because punitive damages are not insurable in many states.

The cloture vote today sets the stage for a confrontation with the House, which earlier this month had passed a bare-bones bill that just increased the minimum wage from $5.15 to $7.25 in just over two years. Moreover, the Bush administration is also signaling that it supports the Senate version.

Under current law, a business cannot deduct from income "any fine or similar penalty paid to a government for the violation of any law," the Chamber pointed out in a letter to each member of the Senate dated Jan. 26.

"By significantly extending this provision to the nonpenalty portion of settlement payments, the provision would eliminate a deduction for an ordinary and necessary business expense based on the willingness of the taxpayer to settle a legal dispute, regardless of whether there was any wrongdoing," the letter said.

Similarly, the letter added, the proposal to broaden the prohibition on deductibility of punitive damages should be rejected.

"Punitive damages paid to private parties are not fines or penalties by nature, because they are not paid to a government for wrongdoing," the letter said.

Special Reports /

Senate Bill To Hike Insurers' Damage Costs

Related Stories

Recommended For You