FAIRFIELD INSURANCE COMPANY, Appellant, v. STEPHENS MARTIN PAVING, LP; Carrie Bennett, Individually and as Representative of the Estate of Roy Edward Bennett, Deceased, and as Next Friend of Lane Edward Bennett, Cody Lee Bennett, and April Anne Bennett, Minors, Appellees.
No. 04-0728.
Supreme Court of Texas.
Argued Nov. 9, 2004. Decided Feb. 15, 2008.
246 S.W.3d 653
Accordingly, without hearing oral argument, we grant the petition for review, vacate the court of appeals’ judgment, and render judgment dismissing San Patricio County‘s claim for damages for lack of jurisdiction. See
Charles C. Self III, Whitten & Young, P.C., Abilene TX, for appellee.
Michael R. Cooper, Salado TX, for Intervenor.
Wade Caven Crosnoe, Thompson Coe Cousins & Irons, L.L.P., Austin, TX, G. Andrew Veazey, Huval Veazey Felder & Aertker, LLC, Lafayette, LA, Macey Reasoner Stokes, Baker & Botts L.L.P., Robert M. Roach Jr., Cook & Roach, L.L.P., Houston, Robert D. Allen, Meckler Bulger & Tilson LLP, Dallas, Kathleen Hopkins Alsina, Phelps Dunbar, L.L.P., Houston, P.M. Schenkkan, Graves Dougherty Hearon & Moody, P.C., Austin, Fred A. Simpson, Jackson Walker L.L.P., Randall L. Smith, Houston, E. Thomas Bishop, Bishop & Hummert, P.C., Dallas, Mark L. Kincaid, Kincaid, Horton & Smith, Austin, TX, for Amicus Curiae.
Justice WAINWRIGHT delivered the opinion of the Court, joined by Chief Justice JEFFERSON, Justice HECHT, Justice O‘NEILL, Justice BRISTER, Justice MEDINA, Justice GREEN, and Justice WILLETT, and by Justice JOHNSON as to sections I, II, and IV only.
This case is before the Court on a certified question from the United States Court of Appeals for the Fifth Circuit: “Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?” Fairfield Ins. Co. v. Stephens Martin Paving, LP, 381 F.3d 435, 437 (5th Cir. 2004). Pursuant to
I. FACTUAL AND PROCEDURAL BACKGROUND
Stephens Martin Paving, a highway paving company, employed Roy Edward Bennett as a brooming machine operator. On December 20, 2002, Bennett died as a result of injuries that occurred when a brooming machine rolled over. Stephens Martin Paving carried a workers’ compensation and employer‘s liability insurance policy, issued by Fairfield Insurance Company. Fairfield paid workers’ compensation benefits to Bennett‘s wife and children under the policy in accordance with Texas workers’ compensation law.
On January 24, 2003, Bennett‘s survivors sued Stephens Martin Paving for gross negligence, seeking exemplary damages because Stephens Martin Paving allegedly failed to provide a safe place to work,
On February 24, 2003, 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 Stephens Martin Paving in the suit for exemplary damages. Relying on Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026, 1029 (5th Cir. 1978), the federal district court concluded that the language in Fairfield‘s policy covers exemplary damages and that Texas public policy does not prohibit insurance coverage of those damages. The court denied Fairfield‘s motion for summary judgment and entered a judgment declaring that Fairfield has a duty to defend Stephens Martin Paving and a duty to indemnify Stephens Martin Paving as provided by the policy if Stephens Martin Paving is adjudicated responsible for the damages sought in the underlying suit brought by Bennett‘s survivors (either by judgment or settlement). Fairfield appealed, and the Fifth Circuit certified to this Court the question of the insurability of exemplary damages for gross negligence. Fairfield Ins. Co., 381 F.3d at 437;
II. COVERAGE OF EXEMPLARY DAMAGES FOR GROSS NEGLIGENCE
Determining whether exemplary damages for gross negligence are insurable requires a two-step analysis. See, e.g., Grinnell Mut. Reinsurance Co. v. Jungling, 654 N.W.2d 530, 535-37 (Iowa 2002); Fluke Corp. v. Hartford Accident & Indem. Co., 145 Wash. 2d 137, 34 P.3d 809, 814 (Wash. 2001); Brown v. Maxey, 124 Wis. 2d 426, 369 N.W.2d 677, 685 (1985). First, we decide whether the plain language of the policy covers the exemplary damages sought in the underlying suit against the insured.
Second, if we conclude that the policy provides coverage, we determine whether the public policy of Texas allows or prohibits coverage in the circumstances of the underlying suit. We first look to express statutory provisions regarding the insurability of exemplary damages to determine whether the Legislature has made a policy decision. See Town of Flower Mound v. Stafford Estates Ltd. P‘ship, 135 S.W.3d 620, 628 (Tex. 2004) (“Generally, the State‘s public policy is reflected in its statutes.“) (quoting Tex. Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240, 250 (Tex. 2002)); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 873 (Tex. 2000). If the Legislature has not made an explicit policy decision, we then consider the general public policies of Texas.
A. POLICY LANGUAGE
The policy Fairfield issued to Stephens Martin Paving contains two types of insurance: workers’ compensation insurance and employer‘s liability insurance. Under the workers’ compensation part of the policy, Fairfield agrees to pay the benefits that Stephens Martin Paving is required to pay by Texas workers’ compensation law
Under the employer‘s liability part of the policy, Fairfield agrees to pay “all sums [Stephens Martin Paving] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance” and other specific costs. It excludes coverage of “punitive or exemplary damages because of bodily injury to an employee employed in violation of law.” An endorsement to the policy adds that “[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury.” The policy also excludes damages arising from injuries caused by intentional acts.
The Bennetts’ claim against Stephens Martin Paving seeks only exemplary damages for gross negligence. Therefore, the coverage issue in this case concerns only the employer‘s liability part of the policy and not the part of the policy regarding workers’ compensation benefits. Because the Fifth Circuit‘s question is directed only at the public policy of Texas, we limit our discussion to the second prong of the analysis and presume that the policy language covers the exemplary damages sought.
B. TEXAS STATUTORY PROHIBITIONS
When considering whether public policy should prohibit the coverage of exemplary damages in a particular case, courts should study the contexts in which the Legislature has spoken. In a few instances, the Legislature has expressly prohibited or otherwise limited the availability of such insurance.
Health Care Providers: Article 5.15-1, section 8 of the Texas Insurance Code prohibits insurance coverage of exemplary damages assessed against health care providers and physicians, creating an exception for a subset of healthcare providers including hospitals, nursing homes, and assisted living facilities:
No policy of medical professional liability insurance issued to or renewed for a health care provider or physician in this state may include coverage for exemplary damages that may be assessed against the health care provider or physician; provided, however, that the commissioner may approve an endorsement form that provides for coverage for exemplary damages to be used on a policy of medical professional liability insurance issued to a hospital, as the term “hospital” is defined in this article, or to a for-profit or not-for-profit nursing home or assisted living facility.
Guaranty Funds and Excess Liability Pools: The Legislature has explicitly ex
C. WORKERS’ COMPENSATION
This Court has recognized that “the administration of the workers’ compensation system is heavily imbued with public policy concerns.” Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553 (Tex. 2001), superseded by statute,
In Texas, participation in the workers’ compensation system is optional for employers and employees. However, if the employer purchases workers’ compensation insurance, the employer must adhere to the statutory and regulatory guidelines of the Workers’ Compensation Act. Among these requirements is the legislative directive that only workers’ compensation policies approved by the Texas Department of Insurance are available in Texas.8
This exclusive remedy does not prohibit recovery of exemplary damages if the employee‘s death is caused by the employer‘s gross negligence.
(a) Recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage or a legal beneficiary against the employer or an agent or employee of the employer for the death of or a work-related injury sustained by the employee.
(b) This section does not prohibit the recovery of exemplary damages by the
surviving spouse or heirs of the body of a deceased employee whose death was caused by an intentional act or omission of the employer or by the employer‘s gross negligence.
(c) In this section, “gross negligence” has the meaning assigned by
Section 41.001, Civil Practice and Remedies Code .
The Bennetts bring this claim for exemplary damages only under Subsections 408(b) and (c), arguing that Stephens Martin Paving‘s gross negligence caused Bennett‘s death.
TDI is authorized to adopt rules “governing hearings and other proceedings necessary for the promulgation or approval of rates[,] policy forms[,] or policy form endorsements.”
Under the authority delegated to TDI from the Legislature, TDI approves standard workers’ compensation insurance policies and endorsements. See Texas Workers’ Compensation Commission and Employers’ Liability Manual, available at http://www.tdi.state.tx.us/wc/regulation/index.html#manual. As previously discussed, the policy provides two types of insurance coverage—workers’ compensation insurance and employers’ liability insurance. The workers’ compensation part of the policy only provides coverage for benefits required by workers’ compensation law and other enumerated costs, excluding punitive damages. If, under Section 408.001, workers’ compensation insurance provides the exclusive remedy for an injured employee who is participating in the system, then why would the TDI-approved, standard policy—the only policy workers’ compensation insurers may use—provide any additional liability insurance to employers? The statutory scheme and TDI‘s execution of the scheme reveal an intent to provide additional insurance coverage—coverage for an employer‘s gross negligence.11 Although Section 408.001 allows an employee to pursue a claim for exemplary damages against an employer for intentional acts, the insurance policy here excludes coverage for such intentional acts. Thus, the “all sums” language in the employer‘s liability part of this TDI-approved, dual coverage policy covers
III. PUBLIC POLICY CONSIDERATIONS
Although the Legislature‘s expressed direction ends our inquiry in the present case, we recognize that the Fifth Circuit framed its certified question as a broad inquiry about Texas public policy and the coverage of exemplary damages. We hesitate to opine on policy language and fact situations not before us, but also recognize the import of this issue and therefore discuss some of the considerations relevant to determining whether Texas public policy prohibits insurance coverage of exemplary damages in other contexts in the absence of a clear legislative policy decision.
A. SUMMARY OF THE DEBATE
Although determining whether public policy prohibits the insurance coverage of exemplary damages for gross negligence in Texas is a novel question for this Court, the issue is no stranger to the United States’ legal community. Christopher A. Wilson, Lazenby after Hodges—Insurability of Punitive Damage Awards in Tennessee: A Continuing Question of Public Policy, 36 U. MEM. L. REV. 463 (2006); Stephanie L. Grassia, The Insurability of Punitive Damages in Washington: Should Insureds Who Engage in Intentional Misconduct Reap the Benefit of Their “Bargains?,” 26 SEATTLE U. L. REV. 627 (2003); Lorelie S. Masters, Punitive Damages: Covered or Not?, 55 BUS. LAW. 283 (1999); Michael A. Rosenhouse, Annotation, Liability Insurance Coverage as Extending to Liability for Punitive or Exemplary Damages, 16 A.L.R. 4th 11 (1982).
For over forty years, courts, legislatures, and scholars nationwide have struggled with this issue. Of the forty-five states in which the highest court of the state or the legislature has addressed the insurability of exemplary damages in some fashion, twenty-five have established generally that their public policy does not prohibit coverage, sometimes including or excluding the uninsured motorist or vicarious liability contexts.12 Eight states have
Two key cases, decided over forty years ago, continue to illustrate the opposing viewpoints on the insurability of exemplary damages: Northwestern National Cas. Co. v. McNulty, 307 F.2d 432 (5th Cir. 1962), and Lazenby v. Universal Underwriters Insurance Co., 214 Tenn. 639, 383 S.W.2d 1 (1964). In McNulty, a drunk driver seriously injured another motorist in Florida. 307 F.2d at 433. The injured motorist sued for compensatory and punitive damages, securing a verdict for $57,500: $37,500 in compensatory damages and $20,000 in punitive damages. Id. The drunk driver‘s insurance policy provided $50,000 in coverage. Id. The insurer argued that only the compensatory part of the verdict was covered by the policy. Id. The court agreed, holding that Florida public policy prohibited the insurability of punitive damages. Id. at 434.
Key to the court‘s reasoning was its conclusion that Florida law characterized “punitive damages as a penalty, imposed as a means of punishing the defendant in order to deter him and others from antisocial conduct, and to no significant extent compensation.” Id. at 436. The court relied heavily on the different functions of punitive and compensatory damages in different states’ schemes:
The crucial distinction . . . is the different function served by compensatory and punitive damages. In a system of law basing recovery of damages on the defendant‘s culpability, compensatory liability, while it may discourage negligent conduct as a side effect, is primarily designed to shift a loss from a wholly innocent party to one whose fault is responsible for causing the loss, although in many cases the fault of the responsible party may not have been so blameworthy that he would have been punished criminally if the fault had not caused an accident. The rationale of compensatory damages is not so much a policy that the responsible party should pay; it is more a policy that the wholly innocent party should not pay. Insurance against compensatory liability therefore does not frustrate the reason for imposing the liability. But in a case involving the determination that punitive damages are insurable the public policy considerations are broader and more important.
Id. at 438. The court concluded that allowing a wrongdoer “to insure himself against punishment” would result in “a freedom of misconduct inconsistent with the establishment of sanctions against such
The Supreme Court of Tennessee decided the lead case in support of the insurability of exemplary damages only a few years after the McNulty decision. Lazenby, 383 S.W.2d 1. Again, the case involved an insurance company‘s refusal to pay the punitive damages portion of a verdict against a drunk driver. Id. at 2. The court recognized that the dominant purpose of exemplary damages in Tennessee was similar to that discussed in McNulty: “the interest of society and of the agreed [sic] individual are blended and such damages are allowed as punishment for such conduct and as an example or warning to the one so guilty, and others, in order to deter them from committing like offenses in the future.” Id. at 4. Despite the similarity of the two courts’ characterizations of the purpose of exemplary damages, the Tennessee Supreme Court held that the exemplary damages in that case were insurable. Id. at 5.
First, the Lazenby court explained that if criminal sanctions “apparently have not deterred this slaughter on our highways and streets,” then “the closing of the insurance market, in the payment of punitive damages” would be unlikely to deter such wrongful conduct. Id. Second, the expectations of the insured, upon reading the plain language of the insurance policy, was that exemplary damages would be covered absent intentional conduct to injure. Id. The court also concluded that the line between “simple negligence and negligence upon which an award of punitive damages can be made” did not justify a public policy exception for acts otherwise covered by the insurance policy. Id. Finally, the court observed that using public policy arguments to partially void a contract that, if construed as written, would protect the insured from both compensatory and punitive damages should not be done “except in a clear case” and concluded that “the reasons advanced do not make such a clear case.” Id.
These cases outline the primary arguments advanced by the parties in this case and the arguments considered by courts nationwide. We now consider these arguments in light of Texas law.
B. TEXAS PUBLIC POLICY
In the absence of expressed direction from the Legislature, whether a promise or agreement will be unenforceable on public policy grounds will be determined by weighing the interest in enforcing agreements versus the public policy interest against such enforcement. See RESTATEMENT (SECOND) OF CONTRACTS § 178(1) (“A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.“). On one side of the scale is Texas’ general policy favoring freedom of contract. Lawrence, 44 S.W.3d at 553. Courts weighing this interest should consider the reasonable expectations of the parties and the value of certainty in enforcement of contracts generally. See RESTATEMENT (SECOND) OF CONTRACTS § 178(2).18 On the other side of the scale
1. FREEDOM OF CONTRACT
We find applicable here our observations in Lawrence, in which this Court affirmed the enforceability of an agreement related to the Workers’ Compensation Act and considered public policies relevant at that time:
Undoubtedly, the issue we face raises critical and complex public policy issues. And the administration of the workers’ compensation system is heavily imbued with public policy concerns. At the same time, we have long recognized a strong public policy in favor of preserving the freedom of contract. Courts must exercise judicial restraint in deciding whether to hold arm‘s-length contracts void on public policy grounds: . . . Given the lack of any clear legislative intent to prohibit agreements like the ones before us, and absent any claim by the petitioners of fraud, duress, accident, mistake, or failure or inadequacy of consideration, we decline to declare them void on public policy grounds. We believe the factually-intensive, competing public policy concerns raised by the parties and by amici in these cases are not clearly resolved by the statute and are best resolved by the Legislature, not the judiciary.
Lawrence, 44 S.W.3d at 553. This Court has long recognized Texas’ strong public policy in favor of preserving the freedom of contract.
[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider—that you are not lightly to interfere with this freedom of contract.
Nebel, 238 S.W.2d at 185 (quoting Printing & Numerical Registering Co. v. Sampson, LR 19 Eq 462, 465, 1874 WL 16322 (1875)). We also recognize the importance of the “indispensable partner” to the freedom of contract: contract enforcement. Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 94 S.W.3d 163, 176 (Tex. App.—Houston [14th Dist.] 2002, no pet.) (en banc). Importantly, freedom of contract is not unbounded. “As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.” In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129 & n. 11 (Tex. 2004); see Sonny Arnold, Inc. v. Sentry Sav. Ass‘n, 633 S.W.2d 811, 815 (Tex. 1982) (recognizing “the parties’ right to contract with regard to their property as
The Legislature determines public policy through the statutes it passes. Town of Flower Mound, 135 S.W.3d at 628; Grizzle, 96 S.W.3d at 250 (Texas’ public policy is reflected in its statutes); FM Props. Operating Co., 22 S.W.3d at 873. The Legislature has passed many laws declaring certain agreements illegal and, therefore, against public policy. See, e.g.,
In other cases, the Legislature has decided that public policy requires certain conditions be met before an agreement may be enforceable. See, e.g.,
Also, this Court has held in a number of cases over the years that public policy clearly disfavors certain types of agreements.20 In these circumstances, the Court has exercised its authority to determine and enforce public policy.
In situations where the Legislature has not spoken directly on whether public policy prohibits insurance coverage of exemplary damages for gross negligence, a court should consider the purpose of exemplary damages. The common law and legislative development of exemplary damages in Texas informs this analysis.
For over 150 years, this Court has held that exemplary damage awards serve to punish the wrongdoer and set “a public example to prevent the repetition of the act.” Cole v. Tucker, 6 Tex. 266, 268 (1851); Graham v. Roder, 5 Tex. 141, 149 (1849); see also Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 555 (Tex. 1985). We confirmed that dual purpose in Transportation Insurance Co. v. Moriel, citing the Legislature‘s definition of exemplary damages in force at the time of the opinion: “Exemplary damages” means “any damages awarded as an example to others, as a penalty, or by way of punishment.” Transportation Insurance Co. v. Moriel, 879 S.W.2d 10, 16 (Tex. 1994). Although some pre-Moriel decisions recognized that exemplary damages “also exist to reimburse for losses too remote to be considered as elements of strict compensation” or to compensate a plaintiff for inconvenience and attorneys fees, these cases do not undermine the longstanding primary purpose of exemplary damages: to punish and deter. See Hofer v. Lavender, 679 S.W.2d 470, 474 (Tex. 1984) (citing Mayer v. Duke, 72 Tex. 445, 10 S.W. 565 (1889)); Allison v. Simmons, 306 S.W.2d 206, 211 (Tex. Civ. App.—Waco 1957, writ ref‘d n.r.e.); Foster v. Bourgeois, 253 S.W. 880 (Tex. Civ. App.—Austin 1923), aff‘d, 113 Tex. 489, 259 S.W. 917 (Tex. 1924).
Legislative enactments of the last decade clarify compensatory recovery is not a component of exemplary damages in Texas today, and the most recent enactments downplay the role of deterrence and focus squarely on the punitive aspect. Act of April 11, 1995, 74th Leg., R. S., ch. 19, § 1, 1995 Tex. Gen. Laws 108, 109 (deleting “as an example to others” from the definition and instead defining exemplary damages as “any damages awarded as a penalty or by way of punishment“), amended by Act of June 2, 2003, 78th Leg., ch. 204, § 13.02, 2003 Tex. Gen. Laws 847, 887 (current version at
Chapter 41 of the Texas Civil Practice and Remedies Code also makes clear that
(1) the criminal act was committed by an employee of the defendant;
(2) the defendant is criminally responsible as a party to the criminal act under the provisions of Chapter 7, Penal Code;
(3) the criminal act occurred at a location where, at the time of the criminal act, the defendant was maintaining a common nuisance under the provisions of Chapter 125, Civil Practice and Remedies Code, and had not made reasonable attempts to abate the nuisance; or
(4) the criminal act resulted from the defendant‘s intentional or knowing violation of a statutory duty under Subchapter D, Chapter 92, Property Code, and the criminal act occurred after the statutory deadline for compliance with that duty.
(1) the principal authorized the doing and the manner of the act;
(2) the agent was unfit and the principal acted with malice in employing or retaining him;
(3) the agent was employed in a managerial capacity and was acting in the scope of employment; or
(4) the employer or a manager of the employer ratified or approved the act.
an act or omission:
(A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and
(B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.
In determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:
(1) the nature of the wrong;
(2) the character of the conduct involved;
(3) the degree of culpability of the wrongdoer;
(4) the situation and sensibilities of the parties concerned;
(5) the extent to which such conduct offends a public sense of justice and propriety; and
(6) the net worth of the defendant.
The first, second, and fifth evidentiary factors raise concerns of an objective nature. How did the conduct of the defendant, viewed in the abstract, irrespective of the parties, depart from broad norms or expectations? It does not matter whether the defendant was a conglomerate or an individual; the nature of the conduct is what matters. On the other hand, the third, fourth, and sixth factors focus subjectively—because the issue is punishment—on the individual parties. What will it take to punish the defendant?
There is some inherent tension between the policies recognized by freedom of contract and the policy behind awarding exemplary damages. Spreading the risk of, and obligation for, exemplary damages through insurance does not affect the objective factors. They may be evaluated without regard for individual personalities. The issue is this: What penalty should this conduct, in the abstract, bear? But the subjective factors are relevant to a determination of the amount of exemplary damages only if the defendant must pay it to the plaintiff. If exemplary damages are to be paid by insurance, it is less relevant to set the amount based on whether the plaintiff was trusting or the defendant calculating or wealthy.
A few cases applying Texas law have considered whether insurance for exemplary damages is against public policy in light of the purpose behind exemplary damages. Their reasoning regarding the interplay of these competing policies is instructive.
Texas appellate courts have uniformly rejected as against public policy coverage under uninsured or underinsured motorist policies when the insured seeks to recover from his own insurer exemplary damages assessed against a third-party tortfeasor.22 In that situation, the burden of the exemplary damages would fall entirely on the insurer and its policyholders, not on the tortfeasor, thereby entirely defeating the purpose of such damages. In one case, State Farm Mutual Automobile Insurance Co. v. Shaffer, Shaffer was injured in an automobile accident with Torres. 888 S.W.2d at 147. The court of appeals held that it was against public policy to require State Farm, Shaffer‘s insurer, to pay exemplary damages assessed against Torres. Id. at 149. Citing Chapter 41 as establishing the basis and manner for assessing exemplary damages, the court explained that “neither deterrence of wrongful conduct nor punishment of Torres, the wrongdoer, is achieved by imposing exemplary damages upon Shaffer‘s insurance carrier for Torres’ wrongful act.” Id. (citations omitted).
Other Texas courts of appeals have noted that the policy considerations regarding exemplary damages coverage depend on whether the basis for the damages is the conduct of the insured‘s employees or agents. In American Home Assurance Co. v. Safway Steel Products Co., the insurers appealed a declaratory judgment in favor of the insureds for coverage of exemplary damages. 743 S.W.2d at 695-96. Exemplary damages of $750,000 and $1 million had been assessed against the in-
The court of appeals observed that while allowing exemplary damages coverage shifts the burden of the punishment to “the innocent members of society who purchase insurance,” contrary to the purpose of such damages, disallowing coverage for a large corporation means that exemplary damages for the misconduct of perhaps one or only a few employees will “inevitably be passed on to the consumers of its products—who are also innocent,” also contrary to the damages’ purpose. Id. at 704.
In DaimlerChrysler Insurance Co. v. Apple, an employee claimed that three of his employer‘s managers had defamed him. No. 01-05-01115-CV, 2007 WL 3105899, at *1-2 (Tex. App.—Houston [1st Dist.], Oct. 25, 2007, reh‘g filed). The trial court confirmed in part the arbitration panel‘s assessment of exemplary damages of $500,000 against the employer, $500,000 against its owner and CEO, and $50,000 each against the three managers, all of whom were determined to be vice-principals. Id. at *3 & n. 4, at *4.23 Following an appeal, the employer settled with the employee, but the employer‘s insurer under both a CGL policy and an umbrella policy refused coverage of the exemplary damage awards, arguing in part that such coverage was against public policy. Id. at *3-4. The court of appeals disagreed but limited its holding to circumstances “where a corporation is held liable for conduct by vice-principals; the conduct was done without the participation or knowledge of the CEO, officers or shareholders of the corporation.” Id. at *18 (citations omitted). The court explained that under these circumstances “the agreement . . . serves the public good because [the employer], its CEO, its officers, and its shareholders did not commit the wrongful acts and should be allowed to have their insurance policy, for which they paid, indemnify them for the punitive damages.” Id. (citations omitted).24
These courts of appeals cases highlight the general considerations that are important when determining whether the policy behind exemplary damages should limit parties’ ability to contract for coverage of those damages. In the uninsured and underinsured motorist context, it may be ap-
The considerations may weigh differently when the insured is a corporation or business that must pay exemplary damages for the conduct of one or more of its employees. Where 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 many for the wrongful act of one. When a party seeks damages in these circumstances, courts should consider valid arguments that businesses be permitted to insure against them.
Extreme circumstances may prompt a different analysis. The touchstone is freedom of contract, but strong public policies may compel a serious analysis into whether a court may legitimately bar contracts of insurance for extreme and avoidable conduct that causes injury. For example, liability policies themselves normally bar insurance for damages caused by intentional conduct, as did the liability policy in this case. The fact that insurance coverage for exemplary damages may encourage reckless conduct likewise gives us pause. Were the existence of insurance coverage to completely eviscerate the punitive purpose behind awarding exemplary damages, it could defeat not only an explicit legislative policy but also the court‘s traditional role in deterring conscious indifference. See RESTATEMENT (SECOND) OF CONTRACTS § 178(3). However, JUSTICE HECHT‘S concurrence would go further and more fully address these circumstances.
IV. CONCLUSION
The Legislature authorized the Texas Department of Insurance to create a policy that provides insurance coverage for exemplary damages in workers’ compensation cases. Thus, we decline to invalidate the parties’ workers’ compensation contract to enforce a public policy urged by Fairfield but not adopted by the Legislature. In response to the certified question, we answer that the public policy of Texas does not prohibit insurance coverage of exemplary damages for gross negligence in the workers’ compensation context. However, without clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence, we decline to make a broad proclamation of public policy here but instead offer some considerations applicable to the analysis in other cases. Of course, how our answer is applied in the case before the Fifth Circuit is solely the province of that certifying court. Amberboy v. Societe de Banque Privee, 831 S.W.2d 793, 798 (Tex. 1992).
Justice HECHT filed a concurring opinion, joined by Justice BRISTER, Justice MEDINA, and Justice WILLETT.
Justice JOHNSON filed a concurring opinion.
Justice HECHT, joined by Justice BRISTER, Justice MEDINA, and Justice WILLETT, concurring.
The United States Court of Appeals for the Fifth Circuit has certified to us1 this question: “Does Texas public policy pro-
I
I begin with a few general observations. Texas law recognizes and protects a broad freedom of contract. We have repeatedly said that:
if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider—that you are not lightly to interfere with this freedom of contract.
4 Still, freedom of contract is not unbounded. “As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.”5
We have voided contractual provisions that are contrary to public policy,6 includ-
unruly horse, and when you once get astride it, you never know where it will carry you.” This striking illustration admonishes us that the words “public policy” are vague in meaning and dangerous of application, and that, unless we exercise due discrimination, we are likely to fall into error when we come to apply them to the construction of a contract, with a view to determine the validity of its provisions. For this reason, a state‘s public policy must be carefully “deduced from its constitution, laws, and judicial decisions.”10 The requirement of deduction is critical; it cir-According to the well-known dictum of an English judge, public policy “is a very
Other instances, however, may implicate multiple, conflicting policies. For example, we once held that if co-owners of property were insured under the same policy and one of them damaged the property, the innocent owner could not recover on the policy because the wrongdoer would also benefit through his ownership interest, and “public policy dictates that a wrongdoer should not benefit from his wrongdoing.”19 Years later, we came to see that the public policy concerns implicated in the issue were broader and conflicting; these concerns include the prevention of insurance fraud by co-owners acting in collusion, the prevention of unjust enrichment of insurers, and the injustice of imputing one person‘s criminal acts to anThe insurable interest requirement for beneficiaries of life insurance rests on two coexisting policy considerations: (1) that no inducement be offered to one person to take the life of another; and (2) that no one should be permitted to wager on the continuation of a human life.18
II
The sources of public policy considerations relevant to the Circuit‘s question are statutes stating the purpose of punitive damages and prescribing the manner in which they are to be assessed, other stat- utes allowing and disallowing insurance for punitive damages, administrative regulations of insurance, Texas caselaw, and caselaw in other American jurisdictions. I examine each in turn.A
The first public policy consideration, and perhaps the most important because the Legislature has firmly spoken, is that the purpose of punitive damages is to punish. At one time, punitive damages were awarded not only to punish the defendant (hence “punitive“) but to deter others (hence “exemplary“) and to compensate the plaintiff for losses for which the law provided no recovery, like inconvenience, attorney fees, and mental anguish.24 But over the years, new elements of damages became recoverable for many causes of action, thus affording a fuller range of compensation for many claimants. Eventually, in 1987, the Legislature limited the purpose of punitive damages, providing, in Chapter 41 of the Texas Civil Practice and Remedies Code, at section 41.001(3) that:Based on this statute, we held that “punitive damages are levied for the public purpose of punishment and deterrence“,26 omitting—as the Legislature had done—compensation to the plaintiff as part of the purpose of punitive damages. In 1995, the Legislature renumbered the provision Section 41.001(5) and amended it to delete the phrase, “as an example to others“, leaving punishment as the sole purpose of punitive damages.27 The statute was amended again in 2003,28 again to make clear that punitive damages are not compensatory, and it now states:“Exemplary damages” means any damages awarded as an example to others, as a penalty, or by way of punishment. “Exemplary damages” includes punitive damages.25
As originally enacted, Chapter 41 applied to any action for negligence and any action for personal injury, property damage, or death based on strict liability, products liability, or breach of warranty,30 but there were sixteen exceptions.31 In 1995, Chapter 41 was amended32 to reduce“Exemplary damages” means any damages awarded as a penalty or by way of punishment but not for compensatory purposes. Exemplary damages are neither economic nor noneconomic damages. “Exemplary damages” includes punitive damages.29
- the criminal act was committed by an employee of the defendant;
- the defendant is criminally responsible as a party to the criminal act under the provisions of Chapter 7, Penal Code;
- the criminal act occurred at a location where, at the time of the criminal act, the defendant was maintaining a common nuisance under the provisions of Chapter 125, Civil Practice and Remedies Code, and had not made reasonable attempts to abate the nuisance; or
- the criminal act resulted from the defendant‘s intentional or knowing violation of a statutory duty under Subchapter D, Chapter 92, Property Code, and the criminal act occurred after the statutory deadline for compliance with that duty.39
- the principal authorized the doing and the manner of the act;
- the agent was unfit and the principal acted with malice in employing or retaining him;
- the agent was employed in a managerial capacity and was acting in the scope of employment; or
the employer or a manager of the employer ratified or approved the act.40
The insured in the case before us attempts to argue that insurance does not lessen the punishment of punitive damages. The insured‘s premiums may increase. Its insurance may be cancelled. It may be forced out of business. It will be stigmatized as a wrongdoer. But even if an insured would not escape altogether the consequences of punitive damages, insurance would indisputably spread them among many who deserve no punishment at all, which would contravene the policy clearly reflected in Chapter 41. Rather clearly, insuring against punitive damages impairs their purpose.Where a person is able to insure himself against punishment he gains a freedom of misconduct inconsistent with the establishment of sanctions against such misconduct. It is not disputed that insurance against criminal fines or penalties would be void as violative of public policy. The same public policy should invalidate any contract of insurance against the civil punishment that punitive damages represent.
The policy considerations in a state where ... punitive damages are awarded for punishment and deterrence, would seem to require that the damages rest ultimately as well as nominally on the party actually responsible for the wrong. If that person were permitted to shift the burden to an insurance company, punitive damages would serve no useful purpose. Such damages do not compensate the plaintiff for his injury, since compensatory damages already have made the plaintiff whole. And there is no point in punishing the insurance company; it has done no wrong. In actual fact, of course, and considering the extent to which the public is insured, the burden would ultimately come to rest not on the insurance companies but on the public, since the added liability to the insurance companies would be passed along to the premium payers. Society would then be punishing itself for the wrong committed by the insured.41
B
The next question is whether insuring against punitive damages is consistent with the manner in which they are assessed. Chapter 41 provides that punitive damages can be awarded for fraud, malice, gross negligence, or a statutory violation.42 “Fraud” does not include constructive fraud.43 “Malice” requires specific intent to cause substantial injury.44 “Gross negligence” is defined as:an act or omission:
(A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and
Other statutory actions may prescribe a different culpable mental state for punitive damages.46 With these basic standards in mind, section 41.011(a) provides:(B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.45
Three of these factors—(1), (2), and (5)—are objective. The nature of the wrong and character of the conduct consider the defendant‘s actions in the abstract, compared with broad norms and expectations. Were the defendant‘s actions the work of a moment or the product of careful plotting and planning? Did they threaten few or many? Were they merely wrong, or were they offensively wrong? Were they morally, criminally or otherwise especially culpable? Did they pose a heightened offense to public justice and propriety? For such questions, the identity of the defendant, whether an individual or an organization, is irrelevant; the nature of the conduct is what matters. On the other hand, three other factors—(3), (4), and (6)—are subjective. What was the defendant thinking? Was he vile, angry, or malicious, or was he consciously indifferent to an objectively extreme degree of risk to others?48 What was the plaintiff thinking? Was he trusting or suspicious? What will it take to punish the defendant? Is he an individual with limited means or an entity with a large net worth? Applying the objective factors is akin to deciding whether a crime should be a misdemeanor or a felony. The seriousness of the misconduct is not affected by whether the corresponding punitive damages must be paid by the defendant‘s insurer rather than the defendant. But the subjective factors help determine what a specific defendant should be required to pay a specific plaintiff. If punitive damages are covered by insurance, and the burden of payment thus shared in effect by the insurer‘s policyholders, it makes no sense to set the amount based on whether the plaintiff was trusting or the defendant was calculating or wealthy. What a group should pay, as opposed to an individual, depends on how innocent most plaintiffs are, how culpable most defendants are, and the defendants’ mean net worth. From individual, subjective circumstances one cannot extrapolate what penalty the community should bear. The Legislature has required that the specific circumstances of a plaintiff and a defendant be taken into account in determining what amount of punitive damages should be assessed against the defendant and paid to the plaintiff. Insurance coverage makes this impossible. The amount an insured defendant will pay depends on the extent of coverage and any deductible. Thus, insuring against punitive damagesIn determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:
(1) the nature of the wrong;
(2) the character of the conduct involved;
(3) the degree of culpability of the wrongdoer;
(4) the situation and sensibilities of the parties concerned;
(5) the extent to which such conduct offends a public sense of justice and propriety; and
(6) the net worth of the defendant.47
C
In a few instances, the Legislature has expressly prohibited or limited insurance for punitive damages; in a few others, it has expressly allowed such insurance. Although all legislative action is relevant in determining public policy, little can be learned from the statutory provisions related to punitive damages. For reasons never entirely clear, the Legislature has restricted the availability of punitive damages coverage to health care providers, then lifted those restrictions in specific instances. In 1977, as part of the bill adopting the Medical Liability Insurance Improvement Act of Texas, the Legislature provided that professional liability insurance policies issued for physicians and certain other health care providers “in this state“, including hospitals and not-for-profit nursing homes, could not include punitive damages coverage.49 Since the Act addressed what the Legislature found to be a “medical malpractice insurance crisis“,50 the prohibition may have been intended to reduce insurance premiums.51 But it has never been clear whether the prohibition applied to insureds “in this state” or only policies issued “in this state“, so that punitive damages coverage could be obtained from out-of-state insurers.52 If the latter, then the effect of the prohibition on insurance costs was diminished. Furthermore, in 1987, 1997, 2001, and 2003, the statute was amended to allow the Board of Insurance, and later the Commissioner, to approve a policy endorsement providing punitive damages coverage first for hospitals, then not-for-profit nursing homes, then for-profit nursing homes, and finally assisted living facilities.53 These amendments suggest that insurance cost control was never the Legislature‘s motivation. Indeed, it is difficult to discern in these amendmentsSeveral times the Legislature has created or modified guaranty funds and excess liability pools, prohibiting them from paying punitive damage claims either entirely or in part.55 In each instance the Legislature‘s concern appears to have been for the economic impact on these entities of insurance for punitive damages. Finally, since 1987 the Legislature has required commercial liability insurers to file closed claim reports including, among much other information, “amounts paid for ... punitive damages“.56 The reports, which are still required,57 show that punitive damages factor only very slightly into the settlement of commercial liability claims.58 From this legislative activity only a few inferences can be drawn. Since 1977, the(a) Except as provided by Subsection (b), a medical professional liability insurance policy issued to or renewed for a physician or health care provider in this state may not include coverage for exemplary damages that may be assessed against the physician or health care provider.
(b) The commissioner [of insurance] may approve an endorsement form that provides for coverage for exemplary damages for use on a medical professional liability insurance policy issued to:
(1) a hospital; or
(2) a for-profit or not-for-profit nursing home or assisted living facility.54
D
Insurance in Texas, as in other states, is thoroughly regulated. For the most part, policy forms must be approved by the Commissioner of Insurance, and in some instances the Commissioner is authorized to prescribe the use of standard policy forms.60 The workers’ compensation policy from which the Fifth Circuit‘s certified question comes is a standard form policy.61 The Commissioner‘s approval of policy forms including and excluding various types of coverage is some reflection of public policy. Standard form personal automobile policies do not state specifically whether punitive damages are covered, and while two courts have concluded that punitive damages are damages for bodily injury covered by automobile policies,62 that position has been uniformly rejected in the context of uninsured and underinsured motorist coverage63 and is therefore dubious at best. Standard form homeowners’ policies also do not appear to cover punitive damages although the subject is not expressly addressed in the policies. Other policies shave been held to cover punitive damages in the absence of a provision specifically excluding such coverage.64 The workers’ compensation policy in the case before the Fifth Circuit specifically excluded punitive damages assessed “because of bodily injury to an employee employed in violation of the law” but specifically included punitive damages assessed for the death of an employee caused by the employer‘s gross negligence or intentional conduct. Although workers’ compensation benefits are ordinarily the exclusive remedy for an employee injured on the job,65 an action for punitive damages for the death of an employee caused by the employer‘s gross negligence is preserved by Article XVI, § 26 of the Texas Constitution,66 adopted at a time when, as already explained, punitive damages were thought to have a compensatory function. Also, by making a person who kills another “responsible” to the surviving family, the constitutional provision in essence creates a wrongful death action, which the common law did not allow, only with a heightened standard of proof and limited recovery. In both respects, insurance coverage for punitive damages does not present the same inconsistencies with the purpose and man- ner of assessing punitive damages that such coverage would otherwise. Without a complete review of insurance regulation, it is impossible to determine what factors influence the Commissioner of Insurance in deciding whether to approve or disapprove punitive damages coverage. But because of the Commissioner‘s role in regulating the insurance business in Texas, that decision must be taken into account in considering whether the coverage is against public policy.E
A few cases applying Texas law have considered whether insurance for punitive damages is against public policy. These may be divided into three categories in which the punitive damages to be covered are assessed against (1) someone other than the insured, (2) an individual insured based on his own conduct, and (3) a corporate insured based on the conduct of its employees. In the first category are cases involving uninsured or underinsured motorist coverage in which the insured seeks to recoverIn the second category are two cases involving personal automobile insurance. Both concluded that punitive damages coverage is not against public policy. Dairyland County Mutual Insurance Co. v. Wallgren, decided in 1972, was the first case to consider whether punitive damages coverage is against Texas public policy.69 The court concluded that a personal automobile policy‘s coverage of “damages because of ... bodily injury” included punitive damages and that the coverage could not be against public policy because it had been approved by the state regulatory agency.70 As already explained, regulatory approval is certainly one factor to consider in determining public policy, although it may not be conclusive. A 1989 decision in Manriquez v. Mid-Century Insurance Co. held that a personal automobile policy covered punitive damages but did not discuss whether that was consistent with public policy.71 Neither case considered whether insurance against punitive damages should be available when the sole purpose of such damages is punishment, as the Legislature has since determined. In the third category are four cases, two of which involve commercial vehicle insurance. In Ridgway v. Gulf Life Insurance Co., a 1978 diversity-jurisdiction case, the Fifth Circuit summarily affirmed a federal district court‘s decision that punitive damages coverage is not against Texas public policy.72 The district court relied entirely on Dairyland, discussed above, and Home Indemnity Co. v. Tyler as stating Texas law.74 In Home Indemnity, the court held that uninsured motorist coverage of puni-Exemplary damages are assessed to punish a wrongdoer and to serve as a deterrent to future wrongdoers. This policy does not support rendering damages against State Farm since neither deterrence of wrongful conduct nor punishment of Torres, the wrongdoer, is achieved by imposing exemplary damages upon Shaffer‘s insurance carrier for Torres’ wrongful act.68
Outside the insurance context, it is worth noting that this Court has suggested that a person‘s pre-injury waiver of another‘s liability for gross negligence is against public policy while holding that a post-injury waiver is not.89 And one court ofWe express no opinion on whether, as a general rule, Texas policy disallows a party from insuring for exemplary damages. Our holding today is limited to the narrow circumstances before us, where a corporation is held liable for conduct by vice-principals; the conduct was done without the participation or knowledge of the CEO, officers or shareholders of the corporation; and the contract at issue covers “all sums” and is an arm‘s-length transaction between an insurance company and a corporation that distinguishes between conduct done by employees and conduct done by the corporate entity, its CEO, its shareholders, and its officers. Thus, we cannot conclude that allowing the insurance coverage under these limited circumstances violates public policy to punish the wrongdoer.
Viewing the underlying facts concerning this agreement, we also cannot conclude that this agreement is contrary to the public good. Rather, the agreement here serves the public good because [the dealership], its CEO, its officers, and its shareholders did not commit the wrongful acts and should be allowed to have their insurance policy, for which they paid, indemnify them for the punitive damages, which were assessed against the corporation only due to conduct, of which its CEO, officers, and shareholders were not aware, done by its employees who held management positions. We hold that the agreement does not violate public policy.88
F
Finally, though Texas’ public policy is its own, it is formed, not in a vacuum, but in awareness of the law of other American jurisdictions. That law is, of course, heavily influenced by the jurisdiction‘s view of punitive damages. The cases defy easy categorization, but it appears that: 19 states generally permit coverage of punitive damages;92 8 states would permit coverage of punitive damages for grossly negligent conduct, but not for more serious conduct;93 11 states would permit coverage of punitive damages for vicariously-assessed liability, but not directly-assessed liability;94 7 states generally prohibit an insured from indemnifying himself against punitive damages;95 and the remainder have silent, unclear, or otherwise inapplicable law.96 States may fall into more than one category.III
I return now to the Circuit‘s question. The case pending before that court involves a workers’ compensation policy that expressly provides coverage for punitive damages for the death of an employee caused by the employer-insured‘s gross negligence. The policy is a standard form prescribed by the Commissioner of Insurance for workers’ compensation insurance in Texas. The action, as noted above, was- Contracts must be respected, and the right to contract freely should not be restricted without compelling reasons.
- Punitive damages may be assessed only as punishment and not for any other purpose, and thus they must be directed at the specific conduct of an individual defendant and must be based on his particular circumstances, including his net worth.
- Punitive damages coverage may pose an undesirable cost to insureds and to the public.
- Insurance is highly regulated, and the Commissioner of Insurance must have broad discretion to determine when punitive damages coverage may be offered.
Ex parte Cathy Lynn HENDERSON, Applicant.
No. WR-49984-02.
Court of Criminal Appeals of Texas.
June 11, 2007.
Notes
any person, partnership, professional association, corporation, facility, or institution licensed or chartered by the State of Texas to provide health care as a registered nurse, hospital, dentist, podiatrist, chiropractor, optometrist, blood bank that is a nonprofit corporation chartered to operate a blood bank and which is accredited by the American Association of Blood Banks, or not-for-profit nursing home, or an officer, employee, or agent of any of them acting in the course and scope of his employment.
Act of May 30, 1977, 65th Leg., R.S., ch. 817, Part 3, § 2(2), 1977 Tex. Gen. Laws 2039, 2055. Later amendments redefined health care providers and expressly allowed providers to obtain insurance coverage of exemplary damages through an approved policy endorsement. Act of June 3, 1987, 70th Leg., 1st C.S., ch. 1, § 7.01, 1987 Tex. Gen. Laws 1, 35-36 (allowing an endorsement for hospitals); Act of May 21, 1997, 75th Leg., R.S., ch. 746, § 1, 1997 Tex. Gen. Laws 2451, 2451 (allowing an endorsement for not-for-profit nursing homes); Act of May 27, 2001, 77th Leg., R.S., ch. 1284, § 5.02, 2001 Tex. Gen. Laws 3083, 3085 (requiring an endorsement for for-profit nursing homes); Act of May 14, 2003, 78th Leg., R.S., ch. 141, § 2, 2003 Tex. Gen. Laws 195, 195 (allowing an endorsement for assisted living facilities). Fairfield Ins. Co. v. Stephens Martin Paving, LP, 381 F.3d 435, 437 (5th Cir. 2004) (per curiam).