Jottings By An Employer's Lawyer

Wednesday, August 11, 2004

Does Your Texas Insurance Policy Protect You From Punitive Damages? 5th Circuit Laterals to the Texas Supreme Court

If you were a Texas business and bought an insurance policy because you were concerned about the possibility of punitive damages, you need to be following the bouncing ball contained within Fairfield Insurance Company v. Stephens Martin Paving LP,(5th Cir. 8/11/04) [pdf]. The bottom line issue is simple. The insured, Stephens Martin Paving has been sued solely for punitive damages arising out of the death of one of its employees because of its alleged gross negligence. The insurance company filed a declaratory judgment action in federal court in Abilene, arguing it was not required to defend or indemnify Stephens Martin Paving because Texas public policy precludes indemnification for punitive damages as a matter of public policy.

Texas law to say the least is muddled. However, Judge Cummings ruled against the insurance company, holding it was not against the public policy of Texas to ensure punitive damages. In June the 5th Circuit heard arguments and many, far beyond the parties, were watching with bated breath. But today, the folks in New Orleans, perhaps recognizing a tough policy call in the need of making, tossed what might be a political hot potato to the Texas Supreme Court by certifying the following 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?
Of course the Texas Supreme Court doesn't have to accept, but it does make sense to give them the opportunity to address the issue rather than have the 5th Circuit "guess" what the Texas Supremes might ultimately decide when required to address the issue.

And of course deciding this question will not necessarily end the debate, since it focuses on "gross negligence." You could have a different answer if the standard was "intentional acts" which would be the basis under certain employment law statutes as opposed to gross negligence. But if the Texas Supreme Court holds it is against public policy to ensure against "gross negligence" then anyone holding a policy thinking they would be covered for punitive damages should be looking for some strong assurances, preferably backed up by a legal opinion.

If you can't wait to get more information you can check out articles pre-dating today's twist from lawyers at Vinson Elkins [pdf] or Baker McKenzie.

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