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Punitive Damages in Texas - Where Do We Stand?
12.06.04

For the last five years, trial and intermediate level state and federal courts have considered whether Texas public policy allows an award of punitive damages to be insured and paid by liability insurance carriers, and whether a finding of gross negligence or malice is an “occurrence” or excluded by an expected or intended exclusion. Hartford Ins. Co. v. Powell, 19 F.Supp.2d 678 (N.D. Tex. 1998), was the first case to seize upon the new Moriel gross negligence standard and find punitive damages not insurable as against public policy.

Since Powell, the cases reflect on both sides of the dispute -- with the most recent trend finding punitive damages are insurable under Texas public policy and, absent a specific exclusion, covered by liability policies. Compare Comsys Info. Tech. Svc., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex. App. -- Houston [14th Dist.] 2003, pet. pending)(gross negligence, or malice, is not an occurrence under a liability policy) with Westchester Fire Ins. Co. v. Admiral Ins. Co., 2003 WL 21475423 (Tex. App. -- Fort Worth, June 26, 2003, reh’g pending)(conduct occurred pre-Moriel change in gross negligence standard, therefore punitive damages are insurable); Philadelphia Indem. Ins. Co. v. Stebbins Five Cos., 2004 WL 210636 (N.D. Tex. Jan. 27, 2004)(holding that punitive damages are covered by a general liability and professional liability policy and Texas public policy does not prohibit coverage of a punitive damage award); Fairfield Ins. Co. v. Stephens Martin Paving, 2003 WL 22005877 (N.D. Tex. 2003)(question certified by 381 F.3d 435 (5th Cir. 2004)(employer’s liability part of workers’ compensation policy provides coverage for punitive damages awarded for employer’s gross negligence in wrongful death claim).

In the last two months, however, the Texas Supreme Court has been given the opportunity to finally resolve the question as presented to them by the Fifth Circuit in Stephens Martin Paving: Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?

The Texas Supreme Court accepted the certified question. Briefs were filed and oral arguments were heard November 9, 2004. Under Texas rules of appellate procedure, the Supreme Court may answer the question exactly as presented or may choose to answer a slightly narrower question that would resolve the legal issue before the Fifth Circuit -- namely, whether state promulgated workers’ compensation insurance policies may cover punitive damages -- the only damage recoverable against a subscribing employer.

Notably, for Supreme Court watchers, the Supreme Court already has before it an issue regarding an award of punitive damages under the workers’ compensation scheme. See Hall v. Diamond Shamrock Refining Co., 82 S.W.3d 5 (Tex. App. -- San Antonio 2001, pet. pending).

In Hall, the Court reviews the decision of whether a cap of $200,000 applies to punitive damage awards in wrongful death cases in which the employer is a subscriber to workers’ compensation insurance. The alternative cap -- of two times economic damage plus $750,000 -- does not fit with the usual proof presented and verdicts adduced in such wrongful death cases because the plaintiff is not entitled to actual economic or non-economic damages, being restricted by statute to punitive damages.

The Texas Supreme Court takes up the question of coverage for punitive damage awards, at least in a wrongful death/workers’ compensation context, with this backdrop.