On certified question from the Fifth Circuit Court of Appeals, the Texas Supreme Court, in Fairfield Insurance Company v. Stephens Martin Paving, LP, 2008 WL 400397, *1 (Tex. 2008), addressed the issue of whether Texas public policy prohibits a “liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence.” The Court answered this question in the negative and held that Texas public policy does not prohibit coverage under an employer’s liability policy for exemplary damages for an employer’s gross negligence that causes an employee’s death. However, without a clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence, the court declined to make a broad proclamation of public policy but instead offered considerations applicable to the analysis.
The Plaintiff, Roy Bennett, died as a result of injuries sustained when the brooming machine he was operating rolled over. His employer, Stephens Martin Paving, LP, carried a workers’ compensation and employer’s liability insurance policy issued by the Fairfield Insurance Company. After Mr. Bennett’s death, his survivors sued Stephens Martin Paving for gross negligence claiming that the employer failed to provide a safe place to work, failed to follow and enforce OSHA safety rules and regulations, and failed to properly train and supervise its employees. Because Bennett’s survivors were barred by the Workers’ Compensation Act from recovering actual damages, they sought exemplary damages only.
Meanwhile, Fairfield sued Stephens Martin Paving and Bennett’s survivors in federal district court seeking a declaratory judgment that Fairfield owed no duty to defend or indemnify the employer in the underlying suit for exemplary damages. The federal district court concluded that the language in Fairfield’s policy covered exemplary damages and that Texas public policy did not prohibit insurance coverage for those damages. The court entered a judgment declaring that Fairfield had the duty to defend Stephens Martin Paving, as well as indemnify it as provided by the policy if it was adjudicated responsible for the damages sought in the underlying suit brought by Bennett’s survivors. Fairfield appealed, and the Fifth Circuit certified the question of the insurability of exemplary damages for gross negligence to the Texas Supreme Court.
The Texas Supreme Court noted that the determination of whether exemplary damages for gross negligence are insurable requires a two-step analysis. First, the Court had to decide whether the plain language of the policy provided coverage for the exemplary damages sought in the suit against the insured. Second, if the Court concluded that the policy provided coverage, the Court had to determine whether the public policy of Texas allowed for or prohibited coverage in the circumstances presented in the underlying suit. However, because the Fifth Circuit’s question was directed only at the public policy of Texas, the Court limited its discussion to the second prong of the analysis and presumed that the policy language covered the exemplary damages sought.
While considering whether Texas’ public policy should prohibit coverage for exemplary damages, the Texas Supreme Court noted that the deciding court should study the context in which the Legislature has spoken on the issue. Looking to the workers’ compensation statutory scheme and the Texas Department of Insurance’s execution of the same, the Court determined that the Legislature had evidenced an intent to provide additional insurance coverage for an employer’s gross negligence. Therefore, the Legislature’s expressed intent was that Texas public policy does not prohibit insurance coverage for claims of gross negligence.
Although the Legislature’s expressed direction ended the inquiry regarding the case at issue, the Texas Supreme Court recognized that the Fifth Circuit framed its certified question as a broad inquiry into Texas public policy and the coverage of exemplary damages. Although hesitant to opine on policy language and fact situations not before the Court, the Court went on to discuss some of the considerations relevant to determining whether Texas public policy prohibits insurance coverage for exemplary damages in other contexts in the absence of a clear legislative policy decision.