To justify insurance coverage of punitive damages, there must be an independent compensatory purpose for punitive damages to find any social worth in allowing those damages to be insured. But, any rationale previously cited for allowing punitive damages to be insured in the state of Texas has been eliminated by the Supreme Court's recent pronouncements. See Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 40 (Tex. 1998), Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 16-17 (Tex. 1994) and Hartford Cas. Ins. Co. v. Powell, 19 F.Supp.2d 678, 683 (N.D. Tex 1998).
Historically, punitive damages based upon gross negligence was covered conduct. Basically, because the intent threshold for gross negligence was so much lower than for intentional torts, no strong public policy rationale prohibited a risk transfer to the insurance industry. Punitive damage law was substantially changed as a result of the Supreme Court's decision in Moriel, subsequently adopted by the legislature as reflected in the current definition of "malice." Tex. Civ. Prac. & Rem. Code §41.003. To find a defendant liable for malice, the trier of fact must first look objectively to determine whether the defendant's conduct creates an extreme degree of risk, then subjectively, to determine that the defendant had an actual awareness of extreme risk created by his conduct and then acted knowingly indifferent to the plaintiff's rights, welfare and safety. Universal Services Co. v. Ung, 904 S.W.2d 638, 641 (Tex. 1995). See Tex. Civ. Prac. & Rem. Code Ann. §§41.001-41.013. By focusing on a finding of subjective awareness and knowing indifference, the legislature has ensured that no negligent conduct will give rise to an award of exemplary damages.
Any concern that denying insurance coverage for punitive damages might result in permanent financial collapse to businesses is no longer an issue. Because the defendant's net worth is now discoverable, the jury can consider the financial impact of the punitive award. If a jury issues a punitive award that amounts to a "death penalty," it can only be a reflection that society simply does not want the corporation to continue to do business. Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 40-41 (Tex. 1998). Lastly, any concern that a corporation might be penalized for the isolated act of one of its employees has been lessened by case law eliminating vicarious liability for punitive damages for a corporation unless the wrongful, malicious acts were by its vice principals. Hammerly Oaks, Inc. v. Edwards, 958 S.W.2d 387, 393 (Tex. 1997).
The United States District Court for the Northern District of Texas has assessed Texas case law and statutory law to conclude that the strong public policy as set forth in Moriel makes punitive damages uninsurable in Texas. Hartford Cas. Ins. Co. v. Powell, 19 F.Supp.2d 678, 683 (N.D. Tex. 1998). The Texas Supreme Court has not rendered an opinion on whether current public policy permits liability insurance to cover punitive damage awards, Government Employees Ins. Co. v. Lichte, 792 S.W.2d 546 (Tex. App. -- El Paso 1990), writ denied per curiam, 825 S,W,2d 431 (Tex. 1991), but the court's decision in Moriel and the legislature's reaction in obvious strong agreement could be the first steps to a decision by the Texas Supreme Court denying coverage for punitive damages.
A longer version of this article appeared in the Dallas Bar Headnotes, and is reprinted with permission.