This past Friday, the Texas Supreme Court issued a important decision on the availability of liability insurance to cover punitive damage awards when it answered the following certified question presented by 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 Fairfield Insurance Co. v. Stephens Martin Paving, L.P., 2008 WL 400397 (Tex. February 15, 2008), the Court in a limited holding found “Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case.” In doing so, the Court provided an extensive and thought-provoking discussion of the law from other jurisdictions, Texas statutory and legislative considerations, Texas case law addressing the issue in other contexts and public policy issues including the “freedom of contract” and the underlying purpose of imposing punitive damages.
In this case, an employee died as a result of on the job injuries and the resulting lawsuit alleged the insured employer “failed to follow and enforce OSHA safety rules and regulations.” The policy at issue provided workers’ compensation and employers’ liability insurance that covered “all sums the insured [Stephens Martin Paving] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance.” But, it excluded coverage for damages arising from injuries caused by intentional acts and “punitive or exemplary damages because of bodily injury to an employee employed in violation of law.” However, an endorsement provided “[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury.” Because the certified question only focused on the public policy considerations, the court did not address the potential coverage issues and presumed the policy covered the punitive damages sought.
In reaching its decision that coverage for punitive damages was not against Texas public policy, the court focused on the statutory workers’ compensation scheme and accompanying insurance regulations. The court found because the Texas Workers Compensation Act allowed recovery of exemplary damages caused by the employer’s gross negligence and because the Texas Department of Insurance's execution of that scheme and approval of policy forms reveals an “intent to provide coverage for gross-negligence” while excluding intentional acts, the high court of Texas found the “Legislature’s expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context.”
The decision was one of the oldest cases on the Court's docket probably indicating the intense internal struggle over the important issues raised by this case. While the holding is troubling to this author at multiple levels, the obvious and easy solution is for liability insurers to craft expansive punitive damage exclusions in their liability policies. This decision only deals with the public policy implications of extending coverage to punitive damages when the policy is otherwise silent on such coverage.
