When it comes to the potential availability of coverage for punitive damages there is often more than meets the eye. First, the answer to the oft-asked question, whether punitive damages are insurable in such and such state, is many times provided by one word: yes or no. While one of those two answers may be the right one generally, the issue is often-times much more complex than can be adequately answered with a single word. In fact, when all of the variations of the issue are considered, there may be as many as a dozen possible answers to the question whether punitive damages insurable.
In addition, in my experience, punitive damages are often referred to, generally speaking, as uninsurable. However, as the Texas Supreme Court pointed out a few years ago, punitive damages, in some way, shape or form, are insurable in 38 states.
Speaking of Texas and punitive damages coverage, in Tesco Corp. v. Steadfast Ins. Co., No. 13-91 (Tex. Ct. App. Aug. 28, 2014), [enhanced version available to lexis.com subscribers], a Texas Appeals Court addressed coverage for $1.5 million in punitive damages awarded in an action for injuries sustained by a worker on a Tesco Corp. drilling rig. The trial court concluded that Colorado law applied and punitive damages are not insurable there. Case closed.
The Texas appeals court saw it differently. The court concluded that Texas law governed the dispute. From there it turned to whether the punitive damages awarded to the injured worker, in the underlying suit, were covered. The court started where it must – the policy language. The court held that the policy language encompassed coverage for punitive damages. “Generally, language in a standard form liability policy providing for coverage for ‘sums’ or ‘all sums’ an insured becomes liable to pay as a result of bodily injury encompasses punitive damages, if not otherwise excluded. There is no language in the Policies making any distinction as to the types of damages covered or expressly excluding coverage for punitive damages. Steadfast could have included an express exclusion from liability for punitive damages, but it did not.”
[In my experience, people sometimes jump right to the question whether a state’s public policy permits coverage for punitive damages. But the true starting point needs to be the policy language. If the punitive damages are not covered by the policy language, then they are not covered by the policy, and public policy permissibility is never reached. For example, many states that have looked at the issue have held that a policy that provides coverage for “compensatory damages” does not cover punitive damages, but punitive damages are not compensatory damages.]
Now the court reached the public policy issue. It answered the question, whether Texas public policy precludes coverage for punitive damages, this way: depends. “[W]hen the insured is a corporation or business that must pay exemplary damages for the conduct of one or more of its employees, and other employees and management are not involved in or aware of an employee’s wrongful act, the purpose of exemplary damages may be achieved by permitting coverage so as not to penalize the many for the wrongful act of one. When a party seeks damages under these circumstances, courts should consider valid arguments that businesses be permitted to insure against them.” (citation and internal quotes omitted).
In other words, were other Tesco employees/management aware of, or involved in, the supervisor’s wrongful conduct or the pervasiveness of the practice at issue [a certain drilling technique that allegedly caused the injuries]? If so, then the injury may have been caused by avoidable conduct “such that public policy is best served by requiring the insured to bear the costs of punitive damages.” Presumably there will now be a trial on the extent that Tesco employees/management had such awareness of, or involvement in, the drilling practice at issue.
[I have not considered whether, or how, this analysis differs from the often-seen distinction between no coverage allowed for directly-assessed punitives but coverage is available for vicarious liability-assessed punitives.]
So are punitive damages insurable in Texas? The answer can be provided in one word – it’s just that the word isn’t yes or no.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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