Coverage for Exemplary Damages Under Employer's Liability Policy for Employer's Gross Negligence

The Supreme Court issued the decision in the Fairfield Insurance Company v. Stephens Martin Paving, 246 S.W.3d 653 (Tex. 2008) on February 15, 2008.  The Court heard oral arguments on November 9, 2004.  The Court held public policy does not prohibit coverage for exemplary damages under an employer’s liability policy for the employer's gross negligence which caused the employee's death. 
 
In the case, the injured worker died while in the course and scope of employment.  His survivors received workers’ compensation benefits sought exemplary damages from the employer.  The United States Court of Appeals for the Fifth Circuit 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?"  The Texas Supreme Court presumed the policy language covered exemplary damages.  The Supreme Court addressed public policy considerations.
 
The Court held, "The statutory scheme and TDI's execution of this scheme reveal an intent to provide additional insurance coverage - coverage for an employer's gross negligence."  They arrived at this finding based on the two types of policies for an employer: workers' compensation and employer’s liability.  The Court continues, "The legislature's expressed intent is Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context."
 
The Court then went on to consider whether public policy prohibits insurance coverage of exemplary damages for gross negligence and recognized that this is a novel question for the Court.  The Court found that forty-five other states have addressed this issue in some fashion.  Twenty-five states have generally held that public policy does not prohibit coverage, although some include or exclude the uninsured motorist or vicarious liability causes of action.  Eight states generally prohibit insuring against exemplary damages.  Seven allow coverage only in the vicarious liability context and three allow coverage in the uninsured motorist context.  Two states precluded coverage in the uninsured motorist context.  Indiana, Michigan, Missouri, and Texas have not addressed the issue through legislation or by decision of its highest court.  Therefore, the Court found the majority of states allow coverage of exemplary damages in at least some context.