An End to the Debate on the Insurability of Punitive Damages in Texas is on the Horizon
Since the Texas Supreme Court’s decision in Transportation Insurance Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994), the issue of whether punitive damages are insurable under Texas Law has undergone a heated debate for what is now considered a “high-stakes” game in which both sides have a lot to lose. Prior to 1994, punitive damages for grossly negligent conduct were generally found to be insurable under Texas law. However, in Moriel, the Court raised the level of intent required for a defendant to be subject to punitive damages. In its analysis, the Court noted that the legal justifications for the imposition of punitive damages in Texas are punishment and deterrence. When a defendant whose conduct is so fraudulent or malicious as to warrant the imposition of punitive damages can pass along the burden of paying for those damages to his insurance carrier, one can argue that the above purposes are not being achieved. contractually?…If they don’t want to cover [punitive damages], don’t.”2 Stephens Martin’s counsel’s agreed, arguing that an insurance company should be bound by the terms of its contract and if the contract covers punitive damages, then the insurance company should be required to pay. Because the insurability of punitive damages greatly impacts Texas businesses, the insurance industry, and the legal profession, the Fifth Circuit refrained from guessing as to what the Texas Supreme Court would do. Instead, the panel certified and sent the following question to the Texas Supreme Court for a ruling: “Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?” KATHRYN D. RISINGER Lawyers all over Texas are speculating on what the Court’s decision will hold. The stakes in this game are high. If the Court finds that insuring punitive damages is not against Texas public policy, an insured who buys an insurance policy will suffer essentially no repercussions for his grossly negligent behavior, other than higher insurance premiums, and the legal justifications for punitive damages go to the wayside. Following Moriel, Texas intermediate courts battled over whether or not punitive damages were still insurable under Texas law. See, e.g., Milligan v. State Farm Mut. Auto Ins. Co., 940 S.W.2d 228 (Tex. App.—Houston [14th Dist.] 1997, writ denied) (holding that the uninsured motorist clause in the auto policy at issue did not cover exemplary damages); Vanderlinden v. USAA Prop. & Cas. Ins. Co., 885 S.W.2d 239 (Tex. App.—Texarkana 1994, writ denied). But see Westchester Fire Ins. Co. v. Admiral Ins. Co., 2003 WL 21475423 (Tex. App.—Fort Worth 2003) (holding that the insurance policy at issue covered the policyholder’s liability for punitive damages arising from his gross negligence); Fairfield Ins. Co. v. Stephens Martin Paving, L.P. et al., 2003 WL 22005877 (N.D. Tex. 1998).1 On November 9, 2004, the Texas Supreme Court heard oral arguments in the case, but, as of this writing, it has yet to issue its decision. During oral arguments, one Justice noted that insurance companies consistently cover punitive damages in settlement negotiations because the parties seldom apportion the settlement amount between actual and punitive damages.3 Following the argument, Fairfield’s counsel commented on the Justices disinterest regarding one particular issue, the duty to defend an insured. “It’s one of the biggest concerns policyholders have. If a plaintiff makes a punitive damage claim against a policyholder, and the high court decides that insuring against punitive damages is not permitted, policyholders worry that insurance companies may not be required to provide them with a lawyer to defend the case.”4 After almost a decade of uncertainty and speculation, we will soon have a winner in this “high-stakes” game. Lawyers all over Texas are speculating on what the Court’s decision will hold. The stakes in this game are high. The recent case responsible for re-focusing the spotlight back on this issue is Fairfield Insurance Co. v. Stephens Martin Paving. In Fairfield, the insurer, Fairfield Insurance Company, filed an action in Texas federal court seeking a declaratory judgment that it did not owe the insured a duty to defend or indemnify it in the underlying suit because the plaintiff was only seeking punitive damages. The district court found for the insured, holding that the insurer owed him both a duty to defend and a duty to indemnify under its policy. Fairfield appealed the district court’s opinion to the Fifth Circuit, and it is this appeal that has paved the way for a decision from the Texas Supreme Court. 1 See Kimberly Van Amburg, Are Punitive Damages Insurable Under Texas Law? The Debate Continues (JW Aviation Flyer), Winter 2004, at 3. 2 John Council, 5th Cir. Considers Insuring for Punitive Damages, Texas Lawyer Vol. 20, No. 15, at 1 (June 14, 2004).
In the Spring of 2004, the Fifth Circuit heard oral arguments in Fairfield Insurance Co. v. Stephens Martin Paving, L.P. et al., 381 F.3d 435 (5th Cir. 2004). Fairfield Insurance Company argued that the Texas Supreme Court’s decision in Moriel changed Texas law. As such, insurance companies should no longer be indemnifying or defending someone for punitive damages because the point of punitive damages is to punish that person for his outrageous behavior.
3 John Council, High Court to Decide if Insuring for Punitives Violates Public Policy, Texas Lawyer Vol. 20, No. 37, at 1 (Nov. 15, 2004).
However, two of the judges on the panel seemed more interested in whether the policy at issue covered punitive damages, asking Fairfield’s counsel “Why isn’t the best way to handle this