Insurance for Punitive Damages in Texas?
February 2008
On certified questions from the Fifth Circuit,
the Texas Supreme Court holds in Fairfield Ins. Co.
v. Stephens Martin Paving, LP (Tex. Feb. 15, 2008), that Texas public
policy does not prohibit coverage for punitive damages under a workers compensation
and employers liability policy.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
The claim arose when an insured's employee died from injuries sustained when
he was struck by equipment while in the course of his employment. The insured
was covered under a workers compensation and employers liability policy. Benefits
were paid to the employee's family; however, an action was filed against the
insured seeking exemplary damages for alleged gross negligence in failing to
provide a safe place to work, to follow and enforce Occupational Health and
Safety Act (OSHA) safety rules and regulations, and to properly train and supervise
its employees.
The insurer filed an action in federal court seeking a declaration that it
owed no duty to defend or indemnify its insured in the suit for exemplary damages.
The federal district court concluded that the policy covered exemplary damages
and that Texas public policy does not prohibit insurance coverage of those damages.
On appeal, the Fifth Circuit found the issue to be undecided in Texas and
requested that the Texas Supreme Court answer the question: 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 a narrow
ruling, the court held that public policy considerations did not prohibit coverage
for the claims.
Public Policy Considerations
In deciding the case, the Texas Supreme Court acknowledged a two-step analysis
in determining whether exemplary damages for gross negligence are insurable—first,
whether the policy language covers the damages; and second, whether public policy
permits coverage for the claims. However, since the Fifth Circuit question was
directed to public policy, the court did not address whether allegations of
OSHA violations triggered policy exclusions and presumed the policy language
covered the claim.
With respect to the public policy considerations, the court first looked
to any statutory prohibitions, concluding that while the legislature has prohibited
coverage of exemplary damages in selected circumstances, the prohibition was
by no means universal under Texas law.
The court next looked to the state's workers compensation laws and implementing
regulations, concluding the statutory and regulatory scheme revealed an intent
to provide the additional coverage for an employer's gross negligence. Thus,
in view of the legislature's authorization to provide for coverage for exemplary
damages in workers compensation cases, the court declined to invalidate it on
public policy grounds. This, the court found, was enough to conclude its inquiry,
and the court declined to make any broad pronouncements about Texas public policy
concerning insurance for punitive and exemplary damages.
The Court's Analysis
In view of the certified question, however, the court did offer a thoughtful
overview and analysis of the broader public policy considerations. Central to
the debate, the court observed, is the different functions of compensatory and
punitive damages. While compensatory damages are designed to compensate for
loss, exemplary damages are intended to punish and deter. Allowing parties to
escape these consequences through insurance might defeat these objectives.
The court concluded that whether an agreement will be unenforceable on public
policy grounds will ultimately be determined by weighing the interest in enforcing
agreements versus the public policy interest against such enforcement. This,
the court reasoned, requires a balancing of Texas's strong policy favoring freedom
of contract (taking into account the parties' reasonable expectations and the
value of certainty in enforcement of contracts) against the extent to which
the agreement frustrates important public policy.
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