Hanna & Plaut, L.L.P.

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1 Hanna & Plaut, L.L.P. Attrneys at Law 106 E. 6th Street, Suite 600 Austin, Texas Phne (512) Fax (512) INSURABILITY OF PUNITIVE DAMAGES IN TEXAS By David Plaut, Hanna & Plaut, L.L.P. Texas decisins between 1972 and 1987 allwed fr recvery f punitive damages under standard liability plicies. Since that time, there has been a rather dramatic shift in the attitude f Texas curts. Recent Texas cases indicate that punitive damages are nt insurable. Imprtantly, a recent decisin f the Fifth Circuit -- St. Paul v. Cnvalescent Services -- fund that punitive damages were nt insurable and s the insurer had n Stwers liability. A. Texas Decisins n the Insurability f Punitive Damages There have been seven Texas appellate decisins n the insurability f punitive damages. Tw f these decisins cncerned liability insurance cverage, and five cncerned uninsured mtrist cverage. In additin, there has been ne Fifth Circuit decisin and ne Texas federal district case addressing the insurability f punitive damages. The lder appellate cases hld that punitive damages are insurable while mre recent decisins preclude cverage fr punitive damages. 1. Wallgren Hlds Punitive Damages Are Insurable Apparently, the first decisin f a Texas curt n the insurability f punitive damages is Dairyland Cunty Mutual Insurance C. v. Wallgren, 477 S.W.2d 341 (Tex.Civ.App. Frt Wrth 1972, writ ref d n.r.e.). The issue in Wallgren was whether autmbile insurance cvered punitive damages assessed against an insured. Id. at 342. The curt cncluded that the insuring language f the plicy was brad enugh t extend the cverage t the punitive damage award. The public plicy argument f the insurance cmpany was rejected by the curt s cnclusin that the public plicy f Texas was defined by the language f the insurance cntract inasmuch as the terms and cnditins f the plicy cntract were prescribed and apprved by the State Bard and because the plicy was written in rder t cmply with the requirements f the Texas Mtr Vehicle Safety Respnsibility Act. Id. at

2 2. Tyler Relies n Wallgren and Hlds Punitive Damages Are Insurable The Hustn Curt f Appeals addressed the insurability f punitive damages in Hme Indem. C. v. Tyler, 522 S.W.2d 594 (Tex.Civ.App. Hustn [14th Dist.] 1975, writ ref d n.r.e.). Tyler invlved the standard uninsured mtrist prvisins f a Texas autmbile plicy. The insureds under the plicy were injured in a mtr vehicle cllisin invlving an autmbile perated by an uninsured mtrist. They sued the uninsured mtrist and the insurance cmpany. The jury awarded each f the insureds punitive damages against the uninsured mtrist. The trial curt had entered judgment in favr f the insureds and against the insurance cmpany and the uninsured mtrist, jintly and severally, fr the amunts awarded by the jury as punitive damages as well as the amunts awarded as cmpensatry damages. On appeal, the insurance cmpany argued that cverage did nt extend t the punitive damage awards, maintaining that cverage under the insurance plicy fr thse awards wuld cntravene public plicy. Relying almst entirely n the hlding in Dairyland v. Wallgren, the appellate curt affirmed the trial curt s judgment. The appellate curt als nted that the uninsured mtrist laws are remedial in nature and shuld be interpreted liberally. 3. Fifth Circuit in Ridgway Hlds Punitive Damages Are Insurable In Ridgway v. Gulf Life Insurance C., 578 F.2d 1026 (5th Cir.1978), the Fifth Circuit was required t make an Erie guess abut the insurability f punitive damages in Texas. The Fifth Circuit held there was cverage fr the punitive damage award and that public plicy was nt vilated. The insurer maintained that the insurance cntract, which the curt fund extended cverage t the punitive damage award, vilated the public plicy f the State f Texas. The curt rejected that cntentin, citing Wallgren. 578 F.2d at 1030 (after nting that sme states have nt allwed cverage fr punitive damages, the Fifth Circuit cncluded Texas apparently des nt share this plicy, and that ends the inquiry ). A recent federal district decisin, Hartfrd Casualty Insurance C. v Pwell, 19 F.Supp.2d 678 (N.D. Tex. 1998), recently nted a dramatic shift in the attitude f Texas curts since the decisins f Wallgren and Tyler. Pwell emphasized that Ridgway is clearly wrng when cnsidered in cntext with the present Texas legal envirnment. 19 F.Supp.2d at 696. The district curt als predicted that the Texas Supreme Curt wuld reject the hldings f Wallgren and Tyler and find that public plicy in Texas precludes the insurability f punitive damages. 4. Safway Hlds Punitive Damages Are Insurable Anther appellate decisin, American Hme Assurance C. v. Safway Steel Prds. C., 743 S.W.2d 693 (Tex.App. Austin 1987, writ denied), fund that punitive damages are insurable. The issue in Safway was whether a liability insurance plicy wuld prtect a crpratin that was the insured under the plicy frm a

3 punitive damage award in a trt actin. The curt tk nte f the cmpeting views, citing and quting at length frm Nrthwestern Nat l Cas. C. v. McNulty, 307 F.2d 432 (5th Cir. 1962) (punitive damages nt insurable under Flrida and Virginia law) and Lazenby v. Universal Under. Ins. C., 214 Tenn. 639, 383 S.W.2d 1 (1964) (punitive damages insurable under Tennessee law), but fund that punitive damages were insurable. The Safway curt dubted that the denial f insurance cverage fr punitive damages actually deters the culpable actr and explained that [i]n Texas, juries are nt allwed t cnsider the defendant s wealth, resurces, r ther insurance cverage when assessing cmpensatry r punitive damages. 743 S.W.2d at 704. This bservatin n lnger crrectly reflects Texas law. The Texas Supreme Curt has held that the financial status f the defendant is relevant the jury s determinatin f punitive damages. 5. Lichte Hlds Punitive Damages Are Nt Insurable A 1990 decisin f the El Pas Curt f Appeals addressed the issue f whether uninsured mtrist cverage wuld prvide payment t an insured fr punitive damages recvered by the insured against the uninsured mtrist. Gvernment Emplyees Insurance C. v. Lichte, 792 S.W.2d 546 (Tex.App. El Pas 1990), writ denied per curiam, 825 S.W.2d 431 (Tex. 1991). Withut directly addressing the public plicy issue, Lichte held that cverage did nt exist. The curt emphasized that [t]he purpse f allwing the recvery f punitive damages is t punish the wrngder. Id. at 549. Because the wrngder was the uninsured mtrist and nt the insured, the Lichte curt did nt believe it was bund t fllw the cases hlding that an insured s liability insurance plicy prvides cverage when a judgment is btained against the insured awarding exemplary damages. Id. 6. Vanderlinden fllws Lichte and Hlds Punitive Damages Are Nt Insurable In Vanderlinden v. United Servs. Aut. Ass n Prperty & Cas. Ins. C., 885 S.W.2d 239 (Tex.App. Texarkana 1994, writ denied), the Texarkana Curt f Appeals dealt with the issue f whether a request fr recvery f punitive damages shuld be stricken frm the plaintiff s pleading in her suit against her wn insurance cmpany fr recvery f benefits under uninsured mtrist cverage extended t her by her insurer. The curt cmmenced its analysis bserving that [p]unitive damages are typically nt t cmpensate a damaged plaintiff fr his injuries; rather, they are t discurage the defendant frm cntinuing his heinus activities and t likewise discurage thers frm similarly misbehaving. Id. at 240. Vanderlinden acknwledged the cnflict between Tyler and Lichte, but fllwed Lichte, hlding that punitive damages are nt insurable. The curt explained that [m]st f the states that have expressly cnsidered this questin have held that in this cntext an insurance cmpany shuld nt be liable

4 fr punitive damages because t allw such a recvery wuld be antithetic t the acknwledged purpse t be served by renditin f such damages. Id. at Shaffer Hlds Punitive Damages Are Nt Insurable Cverage fr punitive damages was als rejected in State Farm Mut. Aut. Ins. C. v. Shaffer, 888 S.W.2d 146 (Tex.App. Hustn [1st Dist.] 1994, writ denied). The Shaffer curt held that, under usual rules f cnstructin f insurance cntracts, the language f the insurance plicy wuld extend cverage t punitive damages. The curt lked t the legislative intent f the Texas statute that defined the purpse f uninsured mtrist cverage, which the curt cncluded was t prtect cnscientius mtrists frm financial lss caused by negligent financially irrespnsible mtrists. Shaffer als lked t the bjective f the Texas Mtr Vehicle Safety- Respnsibility Act, which has as its bjective the prtectin f persns frm ptential lsses arising ut f the peratin f a vehicle. After examining bth statutry enactments, the curt nted that it appears that the legislative intent... is nly t prvide cmpensatry damages t an injured party under an uninsured mtrist plicy. Id. at 149. Shaffer emphasized that neither deterrence f wrngful cnduct nr punishment f [the insured], the wrngder, is achieved by impsing exemplary damages upn [the] insurance carrier.... Id. 8. Hustn Curt f Appeals Revisits Tyler and Hlds Punitive Damages Are Nt Insurable In Milligan v. State Farm Mutual Autmbile Insurance C., 940 S.W.2d 228 (Tex.App. Hustn [14th Dist.] 1997, writ denied), the Hustn Curt f Appeals tk a secnd lk at its earlier decisin in Tyler, which held that punitive damages were insurable. In Milligan, the curt pinted ut that Tyler relied n Dairyland v. Wallgren in finding that punitive damages were insurable. Milligan recgnizes that subsequent appellate decisins -- including Shaffer, Vanderlinden, and Lichte -- are cntrary t Tyler. Emphasizing the evlving nature f Texas law n the subject, the Milligan curt rejected its earlier hlding in Tyler, finding that [i]n view f the Texas Supreme Curt s clear guidelines cncerning the impsitin f exemplary damages and the plicy reasns therefr, we n lnger accept the psitin taken in Tyler. Milligan agreed with Shaffer and thus held that the uninsured mtrist clause in the aut plicy did nt cver exemplary damages as a matter f law. Id. at 232. B. Other Jurisdictins that Preclude the Insurability f Punitive Damages The fllwing states have recgnized that it is against public plicy t insure against punitive damages:

5 Arizna (State Farm Mut. Aut. Ins. C. v. Wilsn, 162 Ariz. 251, 782 P.2d 727 (1989)); Califrnia (J.B. Aguerre, Inc. v. American Guarantee & Liab. Ins. C., 59 Cal. App.4th 6, 68 Cal. Rptr.2d 837 (1997)); Clrad (Lira v. Shelter Ins. C., 913 P.2d 514 (Cl.1996)); Cnnecticut (Bdner v. United Servs. Aut. Ass n, 222 Cnn. 480, 610 A.2d 1212 (1992)); Flrida (U.S. Cncrete Pipe C. v. Buld, 437 S.2d 1061, 1065 (Fla.1983)); Illinis (Warren v. Lemay, 144 Ill.App.3d 107, 98 Ill.Dec. 279, 494 N.E.2d 206, 212 (1986)); Indiana (Cmmercial Unin Ins. C. v. Ramada Htel Operating C., 852 F.2d 298, 306 n. 9 (7th Cir.1988)); Kansas (Hartfrd Accident & Indem. C. v. American Red Ball Transit C., 262 Kan. 570, 938 P.2d 1281, cert. denied, 118 S.Ct. 372, 139 L.Ed.2d 290 (1997)); Minnesta (Lake Cable Partners v. Interstate Pwer C., 563 N.W.2d 81 (Minn.Ct.App.1997)); Missuri (Crull v. Gleb, 382 S.W.2d 17 (M.Ct.App.1964)); Nevada (Lmbardi v. Maryland Cas. C., 894 F.Supp. 369 (D.Nev.1995)); New Jersey (Jhnsn & Jhnsn v. Aetna Cas. & Sur. C., 285 N.J.Super. 575, 667 A.2d 1087 (App.Div.1995)); New Yrk (Zurich Ins. C. v. Shearsn Lehman Huttn, Inc., 84 N.Y.2d 309, 618 N.Y.S.2d 609, 642 N.E.2d 1065 (1994)); Nrth Dakta (Emplyers Reinsurance Crp. v. Landmark, 547 N.W.2d 527 (N.D.1996)); Ohi (Ruffin v. Sawchyn, 75 Ohi App.3d 511, 599 N.E.2d 852 (1991)); Oklahma (Jrdan v. Cates, 935 P.2d 289 (Okla.1997)); Pennsylvania (Butterfield v. Giuntli, 448 Pa.Super. 1, 670 A.2d 646 (1995)); Rhde Island (Duglas v. Bank f New England/Old Clny N.A., 566 A.2d 939 (R.I.1989)); and Suth Dakta (City f Frt Pierre v. United Fire & Cas. C., 463 N.W.2d 845 (S.D.1990)). C. Jurisdictins Hlding Punitive Damages are Insurable Sme states have n clear plicy n the insurability f punitive damages. Fr example, Maine disallws cverage fr punitive damages in the uninsured mtrist cntext, but n case addresses liability insurance. Braley v. Berkshire Mut. Ins. C., 440 A.2d 359 (Me.1982). There d nt appear t be any applicable cases fr Hawaii, Massachusetts, Nebraska, New Hampshire, Suth Carlina, Utah, r Washingtn. The remaining states that have discussed the matter simply cnclude that public plicy des nt preclude cverage: Delaware (Whalen v. On-Deck, Inc., 514 A.2d 1072 (Del.1986) (n evidence f public plicy against such insurance));

6 Gergia (Luncefrd v. Peachtree Cas. Ins. C., 230 Ga.App. 4, 495 S.E.2d 88, (1997) (insurance cverage f punitive damages allwed in liability cntext, but nt in uninsured mtrist cntext)); Iwa (Skyline Harvestre Sys., Inc. v. Centennial Ins. C., 331 N.W.2d 106 (Iwa 1983)); Michigan (Meijer, Inc. v. General Star Indem. C., 826 F.Supp. 241 (W.D.Mich.1993), aff d, 61 F.3d 903, 1995 WL (6th Cir.1995) (nting that n Michigan case has squarely addressed whether an insured shuld be permitted t recver punitive damages frm an insurer but finding that it appears that Michigan law permits recvery)); Mississippi (Anthny v. Frith, 394 S.2d 867 (Miss.1981)); Mntana (Fitzgerald v. Western Fire Ins. C., 209 Mnt. 213, 679 P.2d 790 (Mnt.1984)); New Mexic (Baker v. Armstrng, 106 N.M. 395, 744 P.2d 170 (N.M.1987)); Nrth Carlina (New Suth Ins. C. v. Kidd, 114 N.C.App. 749, 443 S.E.2d 85 (1994)); Oregn (A-1 Sandblasting & Steamcleaning C. v. Baiden, 293 Or. 17, 643 P.2d 1260 (Or.1982) (distinguishing between intentinal act and intentinally inflicted injury )); West Virginia (Perry v. Meltn, 171 W.Va. 397, 299 S.E.2d 8 (W.Va.1982) (punitive damages are awarded t punish and deter, but als benefit the injured party)); Wiscnsin (Brwn v. Maxey, 124 Wis.2d 426, 369 N.W.2d 677 (Wis.1985)); Wyming (Sinclair Oil Crp. v. Clumbia Cas. C., 682 P.2d 975 (Wy.1984). Many f these cases nte the verriding public plicies f freedm f cntract and enfrcing the terms f a cntract against the insurer. The cases hlding that public plicy allws punitive damages t be cvered by insurance d s in a limited number f settings. See, e.g., Alabama (Mntgmery Health Care Facility, Inc. v. Ballard, 565 S.2d 221 (Ala.1990) (Alabama public plicy allws liability insurance t cver punitive damages in the wrngful death cntext)); Arkansas (Suthern Farm Bureau Cas. Ins. C. v. Daniel, 246 Ark.849, 440 S.W.2d 582 (1969) (vicarius liability)); Idah (Abbie Uriguen Oldsmbile Buick, Inc. v. United States Fire Ins. C., 95 Idah 501, 511 P.2d 783, 789 (1973) (adpting the Lazenby apprach)); Kentucky (Cntinental Ins. Cs. v. Hancck, 507 S.W.2d 146 (Ky.1973) (vicarius liability)); Luisiana (Sharp v. Daigre, 555 S.2d 1361 (La.1990) (uninsured mtrist cntext)); Maryland (First Nat l Bank f St. Mary s v. Fidelity & Depsit C., 283 Md. 228, 389 A.2d 359 (1978) (vicarius liability)); Tennessee (Lazenby v. Universal Underwriters Ins. C., 214 Tenn. 639, 383 S.W.2d 1 (1964));

7 Vermnt (State f Vermnt v. Glens Falls Ins. C., 137 Vt.313, 404 A.2d 101 (1979)); and Virginia (United Servs. Aut. Ass n v. Webb, 235 Va. 655, 369 S.E.2d 196 (1988) (nting McNulty verruled by statute)).