Punitive Damages and Texas Public Policy

Two related issues that are currently unsettled under Texas law are whether Texas public policy prohibits insurance coverage of punitive damages and whether public policy prohibits non-insurance contracts from providing indemnity against punitive damages.

INSURANCE

For many years it was settled law in Texas that public policy allowed insurance of punitive damage awards. Dairyland County Mutual Ins. Co. v. Wallgren, 477 S.W.2d 341 (Tex. Civ. App. Aca,!aEURoe Fort Worth 1972, writ refAca,!a,,cd n.r.e.); Ridgway v. Gulf Life Ins. Co., 578 F.2d 1026 (5th Cir 1978).

Then, in 1994, the Texas Supreme Court issued its opinion in Transportation Ins. Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994), restricting the conduct that can lead to an award of punitive damages. Next, the Texas legislature amended the Texas Civil Practice & Remedies Code, making recovery of punitive damages dependent on proof of conduct closely akin to an intention to harm. Tex Civ. Prac. & Rem. Code 41.001 (7) (Vernon 1997).

Based upon these changes in the requirements for recovery of punitive damages, some Texas courts began to reexamine whether Texas public policy prohibits insurance against punitive damage awards. For example, in Hartford Cas. Ins. Co. v. Powell, 19 F. Supp. 2d 678 (N.D. Tex. 1998), a federal judge in Fort Worth decided that, after Moriel, the only remaining purpose of punitive damages was "the public purpose of punishment and deterrence." 19 F. Supp. 2d at 683 (quoting Moriel, 879 S.W.2d at 16-17). Noting that the public policy of Texas is for the courts to ensure that defendants who deserve to be punished receive an appropriate level of punishment, the court made an Erie guess that the Texas Supreme Court would hold Texas public policy was offended by insurance coverage that protect a wrongdoer from an obligation to pay punitive damages. Powell, 19 F. Supp. 2d at 696.

Other Texas courts, however, refused to hold insurance of punitive damages void as against public policy. See Westchester Fire Ins. Co v. Admiral Ins. Co., 152 S.W.3d 172 (Tex. App. Aca,!aEURoe Fort Worth 2004, pet. filed); Fairfield Ins. Co. v. Stephens Martin Paving, L. P., No. Civ. A. 1:03-CV-037-C, 2003 WL 22005877 (N.D. Tex. August 25, 2003) ("This court will stay the course until the legislature, the Texas Supreme Court, or the Fifth Circuit Court of Appeals directs otherwise.").

Because the issue is significant for Texas law and the intermediate Texas courts reached competing rulings with no guidance from the Texas Supreme Court, the Fifth Circuit Court of Appeals certified the following question to the Texas Supreme Court: "Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence." Fairfield Ins. Co. v. Stephens Martin Paving, L. P., 381 F. 3d 435, 437 (5th Cir. 2004). The Texas Supreme Court accepted certification on August 27, 2004, but has not yet answered the question.

INDEMNITY

A similar issue exists with respect to non-insurance contracts for indemnification against punitive damages. So far, the Texas Supreme Court has declined to address this issue. Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d 724, 726 n.2 (Tex. 1989); see Oxy USA, Inc. v. Southwestern Energy Production Co., 161 S.W.3d 277 (Tex. App. Aca,!aEURoeCorpus Christi 2005, pet. filed). One intermediate Texas court has held that decisions whether insurance contracts can allow coverage for punitive damages are inapposite to the question whether a non-insurance contract of indemnity can do so. Crown Central Petroleum Corp. v. Jennings, 727 S.W.2d 739 (Tex. App. Aca,!aEURoe Houston [1st Dist.] 1987, no writ). Another intermediate court has disagreed. Webb v. Lawson-Avila Const., Inc., 911 S.W.2d 457 (Tex. App. - San Antonio 1995, writ dismAca,!a,,cd).

Despite the courtAca,!a,,cs holding in Crown Central, it seems likely that, absent a specific decision by the Texas Supreme Court on the issue whether non-insurance contracts can indemnify against punitive damages, a ruling by the Court on insurability of punitive damages will carry significant weight in deciding the indemnity issue.

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