Do Texas Courts Allow Coverage for Exemplary Damages?

by: Nadia I. Gire

The Supreme Court of Texas in Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 670 (Tex. 2008) held that public policy in Texas does not prohibit insurance coverage of exemplary damages for gross negligence. The Court laid down a two-step process to decide the issue based on a public policy analysis. The first step is to determine if the policy’s plain language covers the exemplary damages sought in the underlying suit against the insured. If the policy provides coverage, the second step is to determine if public policy allows or prohibits coverage under the circumstances of the underlying suit.

Although the Fairfield Court’s holding was limited to workers’ compensation, it also discussed the issue in other contexts. The Court observed that Texas appellate courts have consistently rejected the insurability of exemplary damages under uninsured and underinsured motorists’ policies, relying on public policy grounds. However, the Court did leave the door open to a public policy prohibition against the insurability of exemplary damages in “extreme circumstances” involving avoidable conduct that causes injury. Therefore, the outcome of each case is fact-dependent.

The Court’s decision in Fairfield has been interpreted by subsequent courts in various ways. For example, in Minter v. Great Am. Ins. Co. of N.Y., the Court iterated that Texas public policy prohibits insurance coverage for an intoxicated insured, with two prior DWI convictions, who caused bodily injury. The court in Tesco Corp. v. Steadfast Ins. Co. held that coverage for punitive damages for vicarious liability will likely depend on the circumstances present in a particular situation. Similarly, in Frederking v. Cincinnati Ins. Co., the Court affirmed that Texas public policy precluded an insurer from indemnifying an insured for the exemplary damages awarded against them for their own grossly negligent conduct.

In conclusion, while Fairfield allows coverage for exemplary damages for gross negligence, the outcome of each case is fact-dependent. An insured entity may have strong arguments in favor of coverage for punitive damages when the liability was imposed vicariously. When a party seeks damages under these circumstances, courts should consider valid arguments that businesses be permitted to insure against them. The language in the Fairfield decision suggests that permitting coverage for vicarious liability will not penalize many for the wrongful act of one.

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