Texas Supreme Court Holds That Public Policy Does Not Prohibit Coverage of Exemplary Damages for Gross Negligence
April 14, 2008
In a long awaited decision, the Texas Supreme Court recently held that public policy does not prohibit coverage for punitive damages imposed on an insured for gross negligence under the workers' compensation and employer's liability insurance policy before it. Fairfield Ins. Co. v. Stephens Martin Paving, LP, 2008 WL 400397 (Tex. Feb. 15, 2008).
The insured was sued for gross negligence by an employee's survivors. Because the survivors received workers' compensation benefits, they were barred by statute from recovering compensatory damages and could only seek exemplary damages. The insured's insurer sought a declaratory judgment that it owed no duty to defend or indemnify the insured in the suit for exemplary damages. The trial court denied the insurer's motion for summary judgment, finding that the policy covered exemplary damages and that they were not barred by public policy. The court declared that the insurer had a duty to defend and indemnify the insured if the insured were found liable to the survivors. The insurer appealed, and the U.S. Fifth Circuit Court of Appeals certified to the Texas Supreme Court the question whether exemplary damages for gross negligence are insurable.
The Supreme Court stated that the inquiry requires a two-step analysis. The first step is to determine if the policy's plain language covers exemplary damages, and the second is to determine if Texas public policy allows or prohibits coverage in the circumstances. The policy at issue provided coverage for payments in excess of the benefits regularly provided by the workers' compensation law, including those required because of the employer's serious and willful misconduct or failure to comply with a health of safety law or regulation. The employer's liability portion of the policy excluded from coverage punitive or exemplary damages because of bodily injury to an employee employed in violation of law but only if the violation of law caused or contributed to the bodily injury. The Supreme Court found that the policy provided coverage for exemplary damages. It then considered the public policy issue.
The Supreme Court provided an extensive analysis of the law of other states, Texas legislative considerations and case law, and considered other issues such as freedom of contract, and the underlying purpose for the imposition of punitive damages. It also focused on the statutory workers' compensation scheme and insurance regulations, and noted that the Workers' Compensation Act allows recovery of exemplary damages caused by an employer's gross negligence. The Court concluded that the Texas legislature expressed an intent to provide coverage for gross negligence and that public policy does not prohibit such coverage in this context.
