In answer to a certified question from the 5th Circuit Court of Appeals, the Texas Supreme Court today held that Texas public policy does not prohibit coverage of exemplary damages for gross negligence in the workersâ€™ compensation context. Fairfield Ins. Co. v Stephens Martin Paving, LP, et al, No. 04-0728 (Tex. Feb. 15, 2008).
In responding to the following certified question:
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 Court expressed a reluctance to reach a holding that would apply beyond the facts of the case before it. The Court found that, in the context of workers’ compensation cases and the policy at issue, neither the language of the insurance policy nor Texas public policy prohibits coverage. In reaching this holding, the court relied in part on Texas’ strong policy favoring freedom of contract, but noted that this policy should be balanced against the extent to which the agreement frustrates the important public policy behind exemplary damages â€“ to punish the wrongdoers. Thus, the circumstances of the particular case – i.e., the nature of the conduct and whether the punitive damages are assessed against the insured, the insured’s employee or agent, or a third party – should be evaluated in each case. In the absence of “clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence,” the Court declined to make a broad proclamation of public policy, but instead offered some considerations applicable to the analysis in other cases, noting that “extreme circumstances may prompt a different analysis.”
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