Fairfield Insurance Co. v. Stephens Martin Paving, LP

Here is the greatly shortened version of the case:

FAIRFIELD INSURANCE COMPANY, Appellant, v. STEPHENS MARTIN PAVING, LP

246 S.W.3d 653, 664 (Tex. 2008); Argued Nov. 9, 2004; Decided Feb. 15, 2008.

Majority opinion: Wainwright

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. [W]e answer that Texas public policy does not prohibit coverage under the type of workers’ compensation and employer’s liability insurance policy at issue in this case.

Determining whether exemplary damages for gross negligence are insurable requires a two-step analysis.  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 insura-bility of exemplary damages to determine whether the Legislature has made a policy decision.  If the Legislature has not made an explicit policy decision, we then consider the general public policies of Texas.

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. Eight states have adopted a broad prohibition against insuring exemplary damages. Seven states allow insurance coverage of exemplary damages only in the vicarious liability context, prohibiting the practice otherwise. Three states allow insurance coverage of exemplary damages in the uninsured motorist context, but have not directly spoken outside this context. Two other states have precluded insurance coverage of exemplary damages in the uninsured motorist context, but have not otherwise directly spoken on the issue. Thus, the majority of states that have considered whether public policy prohibits insurance coverage of exemplary damages for gross negligence, either by legislation or under the common law, have decided that it does not.

This Court has long recognized Texas’ strong public policy in favor of preserving the freedom of contract. Tex. Const, art. I, § 16 (“No bill of attainder, ex post facto law, retroactive law, or any law impairing the obligation of contracts, shall be made.”);

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.” 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.” 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. 

In the uninsured and underinsured motorist context, it may be appropriate for policyholders to share in the burden of injuries caused by underinsured motorists, but not their punishment. In other words, the purpose of exemplary damages may not be achieved by penalizing those who obtain the insurance required by law for the wrongful acts of those who do not.

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. 

Hecht concurrence:

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.

To insure an individual against punitive damages for his own gross negligence entirely defeats the punitive purpose of such damages and reduces the disincentive for misconduct. Even if the insured must pay higher premiums, which is not always the case, the punishment is so diluted that the purpose of punitive damages is seriously impaired. For example, the owner of a truck, aware that its brakes are malfunctioning, may be more likely to continue to use it, despite the grave risk to his employees and others, if his liability for punitive damages is covered by insurance and he perceives that the benefit to his business exceeds the cost of his insurance. In that situation, insurance encourages conduct punitive damages are intended to deter.

2. Does the court get it right, i.e. determining that in some instances insurance of punitive damages excessively subverts deterrence whereas in other cases it does not. Do you think the court's test for when to permit insurance of punitive damages accurately predicts the instances where punitive damages deter?  Should it attempt to base insurability on that determination?

3. Isn't some of the argument in favor of insuring punitive damages a stealth argument against punitive damages at all?