The long awaited opinion in Fairfield Insurance Co. v. Stephens Martin Paving, L.P. hints there may be coverage in Texas for punitive damages.

The Texas Supreme Court made its decision via a certified question from the Fifth Circuit, inquiring: “Does Texas public policy prohibit a liability insurer provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?”

While the question was posed broadly, the Court’s holding was a narrow one – limited to coverage under an Employer’s Liability Policy.

The case arose from the death of a Stephens Martin employee, Bennett. Bennett’s survivors filed a gross negligence death suit as permitted under the Texas Labor Code. The Court looked to the overall statutory scheme of the Texas Labor Code (which specifically permits suits for exemplary damages based upon gross negligence in death cases) and noted that the Workers’ Compensation and Employer’s Liability Policy at issue was approved by the Texas Department of Insurance. It concluded that these factors indicated “an intent to provide…coverage for an employer’s gross negligence.”

Thus, on the narrow facts presented, the Court held that Texas public policy does not prohibit insurance coverage for claims of gross negligence under an Employer’s Liability policy.

The Court then, in dicta, commented on the general public policy debate over coverage for punitive damages, noting that the majority of states have permitted such coverage. Turning to Texas law, the Court noted: (1) Texas’s strong public policy in favor of preserving freedom of contract; (2) In Texas, punitive damages primarily serve to punish the wrongdoer – not to compensate the victim, and not as deterrence; (3) Texas courts have uniformly rejected as against public policy coverage for punitive damages under UM/UIM policies; and (4) public policy considerations may differ based upon whether the insurance protects the wrongdoer, himself, or protects, for example, the wrongdoer’s employer. Thus, despite the fact that the Court declined to make a “broad proclamation of public policy,” it has strongly hinted that insurance coverage for punitive damages may be permitted where the insured is not the wrongdoer and not otherwise complicit in the wrongful acts, but may be held to be against public policy where the insured is the actual wrongdoer. This would seem to be consistent with the Court’s general pro-business stance.

By Sid Davis

Sidney H. Davis, Jr. passed away on October 26, 2009. If you are seeking legal help, or have a question about this article or a pending legal matter, please contact Dawn Woelfel Hansen at (214) 741-1166.

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