Monday, March 26, 2018
Are Punitive Damages Covered by Insurance?
For years, insurers and lawyers have debated the issue whether punitive or exemplary damages should be covered by insurance. Typically, exemplary damages are awarded when the conduct of a wrongdoer is found to be intentional or grossly negligent. Gross negligence is conduct taken with actual knowledge of an extreme degree of risk (considering the probability and magnitude of the potential harm to others), and with conscious indifference to the rights, safety, or welfare of others. Because exemplary damages are based upon the level of culpability, and not as compensation for an injured party’s damages, the award is intended to be punishment to the wrongdoer or to deter such conduct by others in the future. If the intent is to punish or deter, then allowing the insurance proceeds to pay punitive damage awards effectively neutralizes that intent. Arguably, in some circumstances, one may not be concerned about their conduct if coverage is certain to apply. This begs the question: Should coverage for punitive damages be prohibited by public policy?
The Approach in Texas
Unfortunately, in Texas, the question whether public policy does or should prevent insurance coverage is not easily answered. While Texas has no general prohibition against coverage for punitive damages, public policy may still prevent it in some circumstances.
In Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 670 (Tex. 2008), the Texas Supreme Court held there was insurance coverage for an employer under a workers’ compensation policy for a punitive damage award. But, the court declined to make a “broad proclamation of public policy on the issue.” Instead, the Texas Supreme Court asked lower courts to determine whether public policy should allow or prohibit coverage for punitive damages on a case-by-case basis. Id. at 655. First, the courts should determine if the plain language of the policy covered the punitive damage award. If coverage exists, then the court should consider whether public policy should prevent insurance from paying under the circumstances of the specific case.
For example, if the facts of the case demonstrate “extreme circumstances” where “avoidable conduct” caused the injury at issue, courts may reject, on public policy grounds, the allowance of insurance coverage for punitive damages. In Am. Int'l Specialty Lines Ins. Co. v. Res-Care, Inc., 529 F.3d 649, 663 (5th Cir. 2008), punitive damages were awarded against a nursing home because a resident was left for a prolonged period in pool of bleach and her chemical burns were left untreated, resulting in death. Public policy was held to prohibit coverage for the punitive damage award because there was “documented systemic problems of care” and a “course of conduct” was so extreme that “punishment and deterrence” became the paramount concern. Id. at 664. Because the conduct was considered so egregious and it was the result of an apparent culture of disregard for residents, the court declined to find coverage for punitive damages -- to ensure the wrongdoer was punished and the conduct deterred in the future. Where the injury is the result of the isolated conduct of a few employees, however, public policy is not served by punishing the company and its shareholders, so the insurance money should be available to pay. Fairfield Ins. Co., 246 S.W.3d at 669.
Uninsured/Underinsured Motorist Coverage
Another example when punitive damages may be against public policy involves uninsured/underinsured motorist coverage. This auto coverage applies to cover damages suffered by an insured driver when another driver causes an accident (referred to as a tortfeasor), but that tortfeasor either lacks insurance entirely or does not have adequate insurance to pay all the insured driver’s damages. Texas appellate courts have uniformly rejected coverage for punitive damages under uninsured/underinsured motorist policies as against public policy. The rationale is that the purpose of punitive damages, to punish the wrongdoer or deter such conduct by others, is defeated entirely if the burden to pay the exemplary damages falls entirely on the insurer and its policyholders, rather than on the tortfeasor. See, e.g. State Farm Mutual Automobile Insurance Co. v. Shaffer, 888 S.W.2d 146 (Tex. App.--Houston [1st Dist.] 1994, writ denied).
When a claim for punitive damages is asserted, insurance coverage does not automatically apply, even if the plain language of the policy would seem to provide otherwise. Instead, the purpose of punitive damages must be considered in light of the circumstances of the case. An attorney at Cowles and Thompson can help you answer questions related to punitive damages, application of policy, and other coverage details.
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