An issue that has received a great deal of attention over the past few years is whether punitive/exemplary damage awards can be covered by insurance policies under Texas law.
Texas is not one of the eight states which expressly prohibit insurance coverage for exemplary damages. The Texas Supreme Court sets forth a method of analysis which calls for an examination of the insurance policy first. If it is determined that the policy provides coverage for exemplary damages, a determination must be made whether the public policy of Texas allows or prohibits coverage in the circumstances of the underlying suit. Fairfield Ins. Co. v Stephens Martins Paving, 246 S.W.3d 653 (Tex. 2008). The Fairfield matter involved a worker’s compensation policy (which provided both worker’s compensation insurance and employer’s liability insurance) which was approved by the Texas Department of Insurance. The policy in question in the Stephens Martins matter included “all sums” language in the employer’s liability portion of the policy, and the Court points to this as indicative of the Legislature’s intent not to prohibit coverage for claims based on gross negligence (the policy also had language explicitly excluding coverage for intentional acts).
In an extensive survey of the law nationwide, the Texas Supreme Court summarized the public policy of practically every jurisdiction that has addressed the insurability of punitive damages, finding that 45 states’ highest courts or legislatures have spoken to the issue. Of those jurisdictions:
- 25 states have generally indicated their public policy does not prohibit coverage for punitive damages;
- Eight states prohibit coverage for exemplary damages;
- Seven states permit coverage for such damages, but only when the insured’s liability is vicarious;
- Three states allow insurance coverage of punitive damages in the uninsured motorist context but have not addressed the issue under other circumstances; and
- Two states prohibit insurance coverage of punitive damages in the context of uninsured motorists but have not addressed the issue with respect to other forms of coverage.
Of the five remaining jurisdictions, four of them (which until Stephens Martin included Texas) have yet to address the insurability of punitive damages, and one state (Nebraska) prohibits the imposition of punitive damages.
In Stephens Martin, the Texas Supreme Court observed that in light of the foregoing statistics, “the majority of states that have considered whether public policy prohibits insurance coverage of exemplary damages for gross negligence, either by legislation or under the common law, have decided that it does not.”
Given insurers’ ability to exercise freedom of contract by expressly excluding punitive damages, agents should certainly carefully scrutinize liability policies for such exclusions, particularly if their clients have expressed an interest in procuring such coverage, or are in parts of the State where punitive damages are commonly awarded. Employers should verify with their insurance agent exactly what is covered, and excluded, with regard to exemplary damages.
Previous Texas cases had reached varying results as to the insurability of punitive damages. For example, in The Philadelphia Indemnity Insurance Company v. Stebbins Five Companies, No. 3:02-CV-1279-M, 2004 U.S. Dist. LEXIS 6374 (N.D. Tex. Jan. 27, 2004), the United States District Court for the Northern District of Texas held that punitive damages are covered under Commercial General Liability (“CGL”) and Professional Liability policies. The court used a two-prong test to find that punitive damages are covered. First, the court asked whether the policy’s terms provided for, and failed to exclude coverage of, punitive damages. Second, the court inquired whether Texas public policy prohibits coverage for punitive damage awards. As to the first inquiry, the court concluded that because the policy’s terms failed to expressly exclude punitive damages, and the insuring clause provided coverage of “all sums” or “those sums” “that the insured becomes legally obligated to pay,” the liability policy was broad enough to encompass punitive damages. Similarly, the court held that a finding of malice and a determination of grossly negligent conduct against the insured in the underlying case does not automatically trigger the intentional or expected injury exclusion. As to the second inquiry, the court determined that insuring punitive damages was not contrary to the public policy of Texas.
On the other hand, in Comsys Information Technology Services, Inc. v. Twin City Fire Insurance Company, 130 S.W.3d 181 (Tex. App. – Houston [14th Dist.] 2003, pet. denied), the Houston Appeals Court determined that punitive damages were excluded from an Excess Temporary Employment Contractors Errors or Omissions Liability Policy. The relevant portions of the policy excluded coverage for:
a. Intentional acts, errors or omissions by or at the direction of the insured.
. . .
b. Any injury or damage arising out of willful, dishonest, fraudulent, criminal or malicious acts, errors or omissions by or at the direction of the insured.
The court determined that because the policy excluded intentional acts, damages for actions committed with malice were excluded under section I.2.a of the policy, and that punitive damages supported by a finding of malice were excluded by section I.2.c. The court also concluded coverage for DTPA violations was similarly excluded as dishonest, fraudulent, or criminal acts under Section I.2.c of the policy.
This Supreme Court decision in Fairfield Ins. Co. v Stephens Martins Paving has substantial impact for nonsubscriber employers with insurance. For example, one employer’s liability plan obtained by one of our Texas nonsubscriber employer clients provides for coverage for “Bodily Injury Damages” which includes “all reasonable amounts paid to obtain a release of liability, settle a claim or pay a judgment based on an action for workplace injury brought against you by an employee.” The policy also excludes coverage for intentional acts. This language is similar to or virtually the same as much of the policy language we see.
Texas courts tend to interpret such a policy to include coverage for gross negligence including any exemplary damages which could be assessed. If you are a nonsubscriber Texas employer and would like us to take a look at your non-subscriber insurance policy, it would probably be useful to your risk management and risk forecasting model for us to do so.
If in our preliminary determination, if we conclude that coverage for exemplary damages is available under the policy, we would then proceed to an analysis of the facts and circumstances in a specific case, on a case by case basis, to determine whether provision of coverage in each particular instance would run afoul of public policy concerns, which will be an important consideration in determining the likelihood of punitive damages coverage. We will be pleased to discuss with you any matters which have prompted concern regarding potential exposure for punitive damages, in order that we may help you complete your nonsubscriber company’s risk management analysis.
Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas nonsubscriber defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.