Texas Supreme Court Decides Issue of Insurability of Punitive Damages
On Friday, February 15, 2008, the Texas Supreme Court issued its long-awaited opinion in Fairfield Insurance Co. v. Stephens Martin Paving, LP, concerning the insurability of punitive damages for gross negligence. The case was before the court on the following certified question from the United States Court of Appeals for the Fifth Circuit: "Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?" In an opinion authored by Justice Dale Wainwright, the supreme court answered, "Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case."
The underlying federal case was brought by Stephens Martin Paving LP's insurer, Fairfield Insurance Company, seeking a declaratory judgment that it owed no duty to defend or indemnify Stephens Martin against a suit for punitive damages for gross negligence brought by the survivors of a Stephens Martin employee who died while operating a brooming machine. Fairfield had issued Stephens Martin a combined workers' compensation and employer's liability insurance policy, which had been approved by the Texas Department of Insurance (TDI), as required by the Workers' Compensation Act. The employer's liability portion expressly excluded claims based on intentional acts. From the fact that the TDI-approved policy provided liability insurance in addition to worker's compensation insurance, the Texas Supreme Court inferred an intent to provide coverage for "some of the common law claims excluded from the workers' compensation part of the policy," i.e., "coverage for an employer's gross negligence." The court therefore concluded, "The Legislature's expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context."
The supreme court restricted its holding to the policy and claim before it, stating that "without clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence, we decline to make a broad proclamation of public policy here but instead offer some considerations applicable to the analysis in other cases." It held that in any given case, courts must weigh the public policy favoring freedom of contract against the public policy behind punitive damages and consider the extent to which enforcing a contract of insurance would frustrate the purposes served by punitive damages. The court noted that, for example, "[i]in the uninsured and underinsured motorist context, . . . . the purpose of exemplary damages may not be achieved by penalizing those who obtain the insurance required by law for the wrongful acts of those who do not." But the court stated that the "considerations may weigh differently when the insured is a corporation or business that must pay exemplary damages for the conduct of one or more of its employees. Where other employees and management are not involved in or aware of an employee’s wrongful act, the purpose of exemplary damages may be achieved by permitting coverage so as not to penalize many for the wrongful act of one."
The opinion of the court was unanimous except as to the discussion of considerations governing other cases, which Justice Johnson did not join. Justice Hecht filed a concurring opinion, joined by Justices Brister, Medina, and Willett. Baker Botts filed an amicus brief on behalf of a group of corporations and associations that provided the court with a survey of the approaches that other jurisdictions have taken to this issue. The court discussed this survey in Part III.A of its opinion.
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