Houston Court of Appeals Finds Punitive Damages Are Covered by Commercial Policies, but Remands the Case for Determination of the Public Policy Issue

September 2, 2014 E-Alerts

Tesco Corporation (US), v. Steadfast Insurance Company,No. 01-13-00097-CV
                                                                                                 (Tex. Aug. 28, 2014)

  The Fourteenth Court of Appeals held that punitive damages are covered under a commercial general liability and umbrella policies, but found that a fact issue existed as to whether Texas public policy prohibited coverage for those damages under the facts presented on appeal. Steadfast Insurance Company issued commercial general liability and umbrella policies to Tesco Corporation, which operated an oil drilling rig in Colorado. A worker on the rig sued Tesco in Colorado for negligence after sustaining injuries while working on the rig. A jury awarded the worker substantial damages for the injuries, as well as $1.5 million in punitive damages. Following the jury trial, Steadfast issued a reservation of rights letter disclaiming coverage for the punitive damages under its policies.

        Tesco filed a declaratory judgment lawsuit against Steadfast in state court in Houston. Tesco and Steadfast filed cross-motions for summary judgment, and the trial court granted summary judgment in favor of Steadfast, finding that Colorado law applied to determine the coverage issues, and Colorado law prohibited insurance coverage for punitive damages. On appeal, Tesco argued that Texas law applied to the insurance dispute, and the punitive damages were covered and insurable under Texas law.

        The Court found that Texas law applied to the insurance dispute based upon the "most significant relationship" test outlined by Sections 6 and 188 of the Restatement (2nd) Conflict of Laws. Steadfast argued the inquiry of whether public policy prohibited coverage should be guided by the more general Restatement Section 6 factors, and cited prior case law noting that the needs of the interstate system were best served by imposing the law of the state in which the underlying torts occurred that gave rise to the imposition of punitive damages. The Houston Court of Appeals disagreed, and emphasized again that the relevant contacts are those each state has with the insurance dispute, not with the underlying lawsuit.

The Court then analyzed whether the plain language of the policies covered the punitive damages, and whether Texas public policy prohibited coverage for those damages under the circumstances of the case, following the Texas Supreme Court's guidelines in Fairfield Ins. Co. v. Stephens Martin Paving, L.P., 246 S.W.3d 653 (Tex. 2008). In a brief discussion, the Court simply noted that the CGL and umbrella policies obligated Steadfast to pay "those sums" and "those damages" that Tesco "becomes legally obligated to pay as damages" arising out of bodily injury claims. The Court also observed that language in a standard liability policy providing coverage for "sums" or "all sums" encompasses punitive damages if not otherwise excluded.

        Like the court in Fairfield, the Houston Court of Appeals focused on the purpose of punitive damages in Texas and the particular facts surrounding conduct that gave rise to the punitive damages. It is worth noting that the decision to apply Texas law to the public policy analysis meant that exploration of the "intent" behind punitive damages was based on Texas statutes and case law - not the Colorado law on which the damages were based and on which the jury was instructed.

       The court observed, as did the Fairfield court, that when the insured is a corporation, the notion of "punishment" is different than where punitive damages are entered against an individual, since punitive damages awarded against a corporation may simply be passed on to the "innocent" owners or consumers. The Court also noted that extreme circumstances may exist precluding insurance coverage for punitive damages against a corporate insured, citing American Int'l Specialty Lines Ins. Co. v. Res-Care, Inc., 529 F.3d 649 (5th Cir. 2008).

The Court analyzed Tesco's summary judgment evidence to determine if the trial court should have granted summary judgment in its favor on the public policy issue. Although the summary judgment record on appeal included the underlying petition and pretrial order containing the parties' stipulated facts, the appellate court found that fact issues preclude summary judgment on the public policy issue. The court remanded the case solely for determination of whether Texas public policy prohibits coverage for the punitive damages under the specific facts of the case. It is doubtful that proceeding will ever take place, as Tesco successfully appealed the underlying judgment, which was vacated earlier this year following a favorable decision from the U.S. Tenth Circuit Court of Appeals.