Opinion

IN THE SUPREME COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 04-0728

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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

════════════════════════════════════════════════════

On Certified Question from the United

States

Court of Appeals for the Fifth

Circuit

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Argued November 9,

2004

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

us [1] this question: “Does Texas public policy

prohibit a liability insurance provider from indemnifying an award for punitive

damages imposed on its insured because of gross negligence?” [2] As usual, the Circuit “disclaim[s] any

intention or desire that the Supreme Court of Texas confine its reply to the

precise form or scope of the question certified.” [3] The Court answers “no” for the workers’

compensation insurance at issue in the federal court action, but the Circuit’s

question is broader and deserves a fuller response than the Court gives. The

Court provides some insight into the relevant considerations, but I would add to

them and describe in more detail the way they should be analyzed. Most of what I

say is consistent with the Court’s opinion, and to that extent I join it.

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] including insurance policy provisions. [7] But we have also recognized that

“[c] ourts must exercise judicial restraint in deciding

whether to hold arm’s-length contracts void on public policy grounds”. [8] We observed long ago:

According to the well-known dictum of an English judge, public

policy “is a very 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. [9]

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 circumscribes judicial authority. Courts are to derive public

policy from existing law, not create it. And courts must also recognize that

public policy may change over time. [11]

Insurance is “an agreement by which one party assumes a risk faced by

another in return for a premium payment.” [12] This risk-shifting is the purpose of

insurance. [13] When the agreement is unique, the

insured’s risk is transferred to an insurer who bears it alone, but when the

agreement is a standard policy offered by an insurer to the general public, the

insured’s risk is, in a real sense, borne by the insurer’s policyholders as a

group, from whose pool of premiums all claims must be paid if the insurer is to

remain in business. One public-policy concern is whether it is or is not in the

public interest for a risk to be shifted. As the cases cited in the margin

illustrate, public policy sometimes insists on risk-shifting, [14] sometimes prohibits it, [15] and sometimes is indifferent, leaving

the matter to the parties’ contract. [16]

In some instances, the effect of public policy on insurance is relatively

simple and uncontroversial. For example, the beneficiary of a life insurance

policy must have an insurable interest in the insured’s life. As the basis for

that rule, we quoted the United States Supreme Court more than a century ago:

“It is generally agreed that mere wager policies — that is, policies in which

the assured party has no interest whatever in the matter insured, but only an

interest in its loss or destruction — are void, as against public policy.” [17] The rule is unquestioned to this day. As

another court has more recently explained:

The 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]

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 an innocent victim. [20] On balance, we concluded that the law

should permit the innocent insured to recover, at least in some circumstances. [21] Still later, we held that when the

co- insureds were married and the property was

community, recovery on the policy by the innocent spouse could not be

conditioned on divorce or partition because the public policy against divorce

was more important than the possibility that the wrongdoing spouse might

benefit. [22] Different policies called for a

different rule in different situations.

In sum, “the business of [insurance] is affected with a public

interest” [23] that is neither simple nor static and

that supercedes the parties’ freedom to contract for

the shifting of risks in some instances and not in others. With that predicate

in mind, I turn to the Circuit’s question.

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 statutes 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:

“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]

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 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]

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 amended [32] to reduce the exceptions to three:

certain actions under the Texas Free Enterprise and Antitrust Act of 1983, [33] actions under the Deceptive Trade

Practices–Consumer Protection Act [34] except as specifically provided in

Section 17.50 of that Act, [35] and actions brought under Chapter 21 of

the Texas Insurance Code. [36] A fourth exception was added in 2005 for

actions under Chapter 36 of the Human Resources Code. [37] The Legislature’s enlargement of the

scope of Chapter 41 over time reflects its intent to establish punishment of the

defendant as the sole purpose of punitive damages in Texas.

Chapter 41 also makes clear that the punishment imposed through punitive

damages is to be directed at the wrongdoer. Section 41.006 provides that “[ i ]n any action in which there are two or more defendants, an

award of exemplary damages must be specific as to a defendant, and each

defendant is liable only for the amount of the award made against that

defendant.” A defendant’s liability for punitive damages based on the conduct of

employees, agents, and associates is also limited. Section 41.005 provides that

“a court may not award exemplary damages against a defendant because of the

criminal act of another” [38] unless:

(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. [39]

Even when the

actor is the defendant’s employee, the defendant is not liable for punitive

damages unless:

(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. [40]

If punitive damages are covered by insurance and paid from policyholders’

premiums, so that the wrongdoer suffers no more than a sliver of the sanction,

the sting of punishment is dissipated. As Judge John Minor Wisdom explained in

his seminal opinion on the insurability of punitive damages in Northwestern

National Casualty Co. v. McNulty :

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]

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.

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

(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]

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:

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. [47]

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 damages conflicts with the way in which such damages

must be assessed under Chapter 41.

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 amendments any policy or policies whatsoever. The statute now

provides:

(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]

Several 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 Legislature seems to have been concerned that liability insurance for

health care providers offered by Texas insurers not be made more expensive by

coverage of punitive damages. But health care providers may not have been

prevented from obtaining insurance covering punitive damages from insurers

outside Texas, and assuming such coverage comes

at additional expense, it has presumably had an effect on the cost of health

care in Texas.

Also, since 1987, the Legislature has made various exceptions for hospitals,

nursing homes, and assisted living facilities, and it is not clear why, or why

there have been no other exceptions. The Legislature has also shown concern that

guaranty funds and excess liability pools, entities funded by assessments and

therefore of limited means, not be burdened by payments for punitive damages.

Again, its concern appears to be economic, even when a pool covers governmental

entities whose liability for punitive damages is limited. [59]

Because the Legislature’s first enactment limited the availability of

punitive damages coverage, it may be tempting to infer that such coverage did

not offend public policy before 1977 and does not do so since except in the

specific situations the Legislature has identified. But this supposes that the

Legislature has taken a comprehensive view of the subject when in fact its

actions have been sporadic over three decades, directed to specific, narrow

circumstances, and largely unexplained. If the predominant concern is the

economic effect of such coverage, as it seems to have been, it is not clear why

that concern has been given voice in only a few situations when it speaks to

many.

Thus, it is difficult to find an indication of public policy in the

legislative limitations on, and express approvals of, punitive damages

coverage.

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 coverage [63] 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 manner 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 recover from his own insurer

punitive damages assessed against a third-party tortfeasor . Recent Texas courts have uniformly rejected such

recovery as against public policy. [67] In that situation, the burden of the

punitive damages would fall entirely on the insurer and its innocent investors

and 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. The court of appeals held that it was against

public policy to require State Farm, Shaffer’s insurer, to pay punitive damages

assessed against Torres. Citing Chapter 41 as establishing the basis and manner

for assessing punitive damages, the court explained:

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]

In 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 [73] as stating Texas law. [74] In Home Indemnity , the court held

that uninsured motorist coverage of punitive damages is not against public

policy, but the same court has since overruled that case and followed the other

courts that have reached the opposite conclusion. [75] Ridgway preceded Chapter 41 by

nine years and did not consider whether punitive damages coverage is consistent

with the purpose of punishment. In 1998, a federal district court in Hartford

Casualty Insurance Co. v. Powell , another commercial vehicle insurance case,

surveyed Texas law since Dairyland and Home Indemnity and concluded

that Ridgway ’s Erie -guess about Texas law “is clearly wrong when considered in context

with the present Texas legal environment.” [76] Powell made its own

Erie -guess that in most instances punitive damages coverage contravenes

Texas public

policy.

The other two cases in the third category involved general liability

policies issued to corporate insureds . Both noted that

the policy considerations regarding punitive damages coverage are different when

the basis for the damages is the conduct of the insured’s employees or agents.

American Home Assurance Co. v. Safway Steel

Products Co. was a consolidation of two declaratory judgment actions, one

involving an umbrella policy and the other an excess policy. [77] Punitive damages of $750,000 and $1

million had been assessed against the insureds ,

respectively, in one case for gross negligence in failing to warn of the

limitations of a football helmet the insured manufactured, and in the other case

for gross negligence in the design and marketing of a scaffold. [78] The court observed that while allowing

coverage of punitive damages would shift the burden of the punishment to

“innocent” insurance purchasers, [79] thus thwarting the purpose of such

damages, disallowing coverage for a large corporation would mean shifting the

burden for the misconduct of a few employees to innocent consumers, [80] which is also contrary to the purpose

for such damages. In the end, the court said, “[t]he question of how to ‘punish’

a corporation is a difficult one.” [81]

American Home was decided in late 1987, shortly after Chapter 41

took effect. It did not refer to that statute and noted specifically that

“[ i ]n Texas, juries are not allowed to consider the

defendant’s wealth, resources, or insurance coverage when assessing compensatory

or punitive damages.” [82] It was not until three months later that

this Court held for the first that a defendant’s net worth is relevant in

assessing punitive damages. [83] The only case to consider the current

provisions of Chapter 41 in determining public policy regarding punitive damages

coverage is DaimlerChrysler Insurance Co. v. Apple . [84] There, a car dealership’s inventory

control manager claimed that his employer’s controller, general manager, and

used car sales manager had defamed him. An arbitration panel agreed and assessed

punitive damages of $500,000 against the dealership, $500,000 against its owner

and CEO, and $50,000 each against the three employees, all of whom were

determined to be vice-principals. [85] The district court confirmed the award

of punitive damages against the dealership and two of the employees, and on

appeal, the dealership settled with the plaintiff. [86] The dealership’s insurer under both a

CGL policy and an umbrella policy refused coverage of the punitive damage

awards, arguing in part that such coverage was against public policy. [87] The court rejected the argument in these

circumstances but stressed that its decision was a limited one:

We 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]

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 of appeals has held that

an agreement to indemnify a person for his own gross negligence is not against

public policy, [90] an issue on which this Court has

expressed no opinion. [91]

In sum, recent Texas courts have uniformly held that uninsured or

underinsured motorist coverage of punitive damages is against public policy, but

in other contexts they have not had the opportunity, except in

DaimlerChrysler , to take into account the importance of the purpose and

manner of assessing punitive damages set out in Chapter 41. That case

particularly, as well as the others, illustrates the important distinctions

between punitive damages coverage for the gross negligence of the insured

himself, the insured’s employees, and third parties.

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 preserved in the Texas Constitution at a time when

punitive damages were often treated as compensatory, and is in the nature of a

wrongful death action with a heightened burden of proof — gross negligence — and

limited damages — punitive only. The purpose and manner of assessing punitive

damages generally, now reflected in Chapter 41, has evolved apart from the

constitutional action. And in many instances, employers will be corporations

whose liability will be due to the conduct of other employees. For these

reasons, I agree with the Court that the coverage does not contravene Texas

public policy.

But the Circuit’s question is broader. The following considerations

inform its answer in other insurance contexts:

•

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.

For uninsured and underinsured motorist coverage, the consensus among the

courts of appeals is that public policy prohibits extending the coverage to

punitive damages. It is one thing for insurers’ policyholders to share in the

burden of injury caused by an underinsured motorist and quite another to share

in his punishment. Penalizing those who obtain the insurance required by law for

those who do not simply cannot be justified.

The considerations weigh differently when the insured is a corporation or

business that must pay punitive damages for the conduct of one or more

employees. Although the conduct is attributable to the business, as it must be

for liability for punitive damages, it will often be the case that stockholders,

other employees, and even management as a larger group have done little to

deserve punishment. Chapter 41 sets out the policy that punitive damages be

directed against specific wrongdoing, but when such damages are assessed against

an entire business for one employee’s wrongdoing, the punishment is at best

indirect. While punitive damages are nevertheless imposed, a valid argument can

be made that businesses should be permitted to insure against them, so that the

burden is shared by others in like situations.

But even if public policy considerations do not preclude punitive damages

coverage for the business, they counsel against extending that coverage to the

wrongdoer himself. 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.

Taking into account the policy favoring freedom of contract, I would hold

that when Chapter 41's punitive purpose would be significantly impaired, and a

defendant’s net worth could not be meaningfully incorporated in the assessment,

as Chapter 41 requires, insurance against punitive damages would violate Texas

public policy unless these considerations are outweighed by other factors, such

as expressions of legislative will, or regulatory approval of the coverage, or

the attenuation of the burden of liability from the misconduct. In these

situations, in my view, there is no formulaic answer to the public policy

question. Chapter 41 provides for punishment of a person who knows full well

that his conduct poses an extreme risk of harm to others and yet does not care.

That, in essence, is gross negligence. The public policy analysis must answer

why punitive damages for such egregious behavior should be avoided by

insurance.

­­­­­­­­­­________________

Nathan L. Hecht

Justice

Opinion delivered: February 15,

2008

[1]

See Tex. Const. art. V, §

3-c(a) (“The supreme court and the court of criminal appeals have jurisdiction

to answer questions of state law certified from a federal appellate court.”);

Tex. R. App. P. 58 (prescribing

procedures for certification of questions of law by federal appellate

courts).

[2]

Fairfield Ins. Co. v. Stephens Martin Paving, LP , 381 F.3d 435, 437 (5th

Cir. 2004) (per curiam ).

[3]

Id .

[4]

Gym-N-I Playgrounds, Inc. v. Snider , 220 S.W.3d 905, 912 (Tex. 2007)

(commercial lease expressly waiving warranties) (quoting Wood Motor Co. v.

Nebel , 238 S.W.2d 181, 185 (Tex. 1951) (construing

contract termination clause) (quoting Printing & Numerical Registering

Co. v. Sampson , 19 L.R.- Eq . 462, 465 (1875)));

In re Prudential Ins. Co. of Am. , 148 S.W.3d 124 , 130 n.11 (Tex. 2004)

(contractual jury waiver) (quoting Wood Motor Co. and Sampson );

BMG Direct Mktg., Inc. v. Peake , 178 S.W.3d

763, 767 (Tex. 2005) (liquidated damages clause) (quoting Wood and

Sampson ); Missouri, Kan. & Tex. Ry. Co. of Tex. v. Carter , 68

S.W. 159, 164 (Tex. 1902) (contract waiving responsibility for fires caused by

railroad engines) (quoting Sampson ).

[5]

In re Prudential , 148 S.W.3d at 129 & n.11; 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 they see fit, so

long as the contract does not offend public policy and is not illegal”);

Woolsey v. Panhandle Refining Co. , 116 S.W.2d 675, 678 (Tex. 1938) (“In

line with the universally accepted rule, this court has repeatedly refused to

enforce contracts which are either expressly or impliedly prohibited by statutes

or by public policy.”); Curlee v.

Walker , 244 S.W. 497, 498 (Tex. 1922) (“The law recognizes the right of

parties to contract with relation to property as they see fit, provided they do

not contravene public policy and their contracts are not otherwise illegal.”);

James v. Fulcrod , 5 Tex. 512, 520 (1851) (“That

contracts against public policy are void and will not be carried into effect by

courts of justice are principles of law too well established to require the

support of authorities, and the only question is whether the agreement set forth

in the petition be or not in violation of public policy or in fraud of the

law.”); see generally Restatement

(Second) of Contracts § 178 (1981).

[6]

See , e.g. , Hoover Slovacek LLP v.

Walton , 206 S.W.3d 557, 559 (Tex. 2006) (termination fee agreement between

lawyer and client); PPG Indus., Inc. v. JMB/Houston Ctrs . Partners Ltd. P’ship ,

146 S.W.3d 79, 82, 87 (Tex. 2004) (assignment of claims for violations of the

Texas Deceptive Trade Practices–Consumer Protection Act); Johnson v. Brewer

& Pritchard, P.C. , 73 S.W.3d 193, 205 (Tex. 2002) (lawyer fee-sharing

agreement); State Farm Fire & Cas . Co. v.

Gandy , 925 S.W.2d 696, 698 (Tex. 1996) (defendant insured’s prejudgment

assignment to plaintiff of claims against liability insurer); Zuniga v. Groce , Locke & Hebdon , 878

S.W.2d 313, 314 (Tex. App.—San Antonio 1994, writ ref’d ) (assignment of legal malpractice claims); Elbaor v. Smith , 845 S.W.2d 240, 241 (Tex.

1992) (“Mary Carter” agreements, in which the defendant receives assignment of

part of plaintiff's claim and both remain parties at trial); Desantis v. Wackenhut Corp. , 793 S.W.2d 670,

681 (Tex. 1990) (unreasonable non-compete agreement); Juliette Fowler Homes,

Inc. v. Welch Assocs., Inc. , 793 S.W.2d 660, 663 (Tex. 1990) (same);

International Proteins Corp. v. Ralston-Purina Co. , 744 S.W.2d 932, 934

(Tex. 1988) (assignment of plaintiff’s claims against one tortfeasor to another tortfeasor );

Hill v. Mobile Auto Trim, Inc ., 725 S.W.2d 168 (Tex. 1987) (covenant not

to compete in a “common calling”); Bergman v. Norris of Houston , 734

S.W.2d 673 (Tex. 1987) (same); Trevino v. Turcotte , 564 S.W.2d 682, 690 (Tex. 1978) (assignment of

right to challenge will to one who had elected to take under will); Crowell

v. Housing Auth. of Dallas , 495 S.W.2d 887, 889 (Tex. 1973) (lease provision

exempting authority from tort liability to tenants); Hooks v.

Bridgewater , 229 S.W. 1114, 1118-1119 (Tex. 1921) (contract transferring

custody of a child in exchange for permitting the child to inherit from the

transferee); Barnhart v. Kan. City, Mex. & Orient Ry. Co. , 184 S.W.

176, 179 (1916) (contract in which employee assumes the risk of workplace

injury); Texas Standard Oil Co. v. Adoue , 19

S.W. 274 (Tex. 1892) (contract creating a combination to fix prices).

[7]

See , e.g. , National County Mut . Fire Ins. Co. v.

Johnson , 879 S.W.2d 1, 2 (Tex. 1993) (family member exclusion in automobile

liability policy); Puckett v. U.S. Fire Ins. Co. , 678 S.W.2d 936, 938

(Tex. 1984) (aviation policy excluding coverage based on lapse of airworthiness

certificate even when lapse is causally unrelated to loss); Unigard Sec. Ins. Co. v. Schaefer , 572 S.W.2d

303, 306 (Tex. 1978) (automobile liability policy endorsement excluding Personal

Injury Protection coverage for one driver ); Jones v. Fid. & Guar. Ins.

Co. , 250 S.W.2d 281, 281-282 (Tex. Civ. App.—Waco 1952, writ ref’d ) (policy covering innocent ex-wife for damages caused

by ex-husband to their jointly-owned property), overruled by Kulubis v. Tex. Farm Bureau Underwriters Ins.

Co. , 706 S.W.2d 953, 955 (Tex. 1986); International Travelers’ Ass’n v. Branum , 212 S.W. 630

(Tex. 1919) (policy provision prescribing venue ); Cheeves v. Anders , 28 S.W. 274, 275 (Tex.

1894) (public policy does not allow one who lacks an insurable interest to own a

policy on another’s life, but an insurer may be required to pay proceeds to

proper parties, and, here, to reimburse an ex-partner for premiums paid by

partners’ now-dissolved firm); Mayher v.

Manhattan Life Ins. Co. , 27 S.W. 124, 125 (Tex. 1894) (“It is against public

policy for one man to become interested in the death of another when he has no

interest in the continuance of life.”). Compare Burch v. Commonwealth

County Mut . Ins. Co. , 450 S.W.2d 838, 840-841

(Tex. 1970) (public policy would preclude an insurance company from knowingly

assuming a previously-occurring loss, but not when the loss was unknown to

person arranging for the insurance, and there was no conscious or negligent

failure to advise him of it); Hatch v. Turner , 193 S.W.2d 668, 669-670

(Tex. 1946) (life insurance policy limiting benefits to premiums paid if covered

person killed in military service in war was not against public policy);

Equitable Life Assur . Soc’y v. Hazlewood , 12 S.W. 621, 624-625 (Tex. 1889) (insured’s

brother, and insured himself, have an insurable interest in insured’s

life).

[8]

Lawrence v. CDB Servs ., Inc. , 44 S.W.3d 544,

553 (Tex. 2001), superseded by statute , Act of June 17, 2001, 77th

Leg., R.S., ch.1456, §§ 16.01, 17.01 & 17.02, 2001 Tex. Gen. Laws 5196 ,

as explained in Villareal v. Steve's & Sons Doors, Inc. , 139

S.W.3d 352, 353-354 (Tex. App.–San Antonio 2004, no pet.) (new statute applied

because employee was injured on July 21, 2001, after amendment’s June 17, 2001

effective date).

[9]

Singer Mfg. Co. v. Rios , 71 S.W. 275, 276 (Tex. 1903) (concluding that a

sewing machine mortgage provision that allowed the mortgagee to repossess the

property, which he did without violence, was not void as against public policy)

(citation omitted).

[10] McElreath v. McElreath , 345 S.W.2d 722, 746 (Tex. 1961) (citations

omitted); see Vidal v. Girard’s Ex’rs ,

43 U.S. (2 How.) 127 , 197-198 (1844) (“The question, what is the public policy

of a State, and what is contrary to it, if inquired into beyond [the limits of

what its constitution, laws, and judicial decisions make known], will be found

to be one of great vagueness and uncertainty, and to involve discussions which

scarcely come within the range of judicial duty and functions, and upon which

men may and will complexionally differ . . . .”);

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 Texas

Commerce Bank, N.A. v. Grizzle , 96 S.W.3d 240, 250 (Tex. 2002));

Lawrence , 44 S.W.3d at 553 (“Public policy, some courts have said, is a

term of vague and uncertain meaning, which it pertains to the law-making power

to define, and courts are apt to encroach upon the domain of that branch of the

government if they characterize a transaction as invalid because it is contrary

to public policy, unless the transaction contravenes some positive statute or

some well-established rule of law.” (internal quotations and citation omitted));

Castillo v. Canales , 174 S.W.2d 251, 253 (Tex. 1943) (“The Legislature

has the power to declare what shall be the policy of the State with reference to

insurance matters.”); see generally Restatement (Second) of Contracts § 179

(1981) (A public policy against the enforcement of promises or other terms may

be derived by the court from (a) legislation relevant to such a policy, or (b)

the need to protect some aspect of the public welfare . . . .”).

[11] State v. City of Austin , 331 S.W.2d 737, 741 (Tex. 1960) (”[S] tatutes and ordinances express the public policy of the

state as it existed at the time of their adoption. Subject to constitutional

limitations, however, that policy may be changed by the Legislature at any

time.”).

[12] Black’s Law Dictionary 802 (7th ed.

1999); see 1 Holme’s Appleman on

Insurance 2d § 1.2, at 3-4 (1996) (At its core essence, risk is the

Mother Mold of insurance.”); Couch on

Insurance 3d § 1.9 (2005) (“The primary requisite essential to a contract

of insurance is the assumption of a risk of loss and the undertaking to

indemnify the insured against such loss.” (footnotes omitted)).

[13] Fortis Benefits v. Cantu , 234 S.W.3d

642, 647 (Tex. 2007) (“an insurance policy's

fundamental purpose . . . is to protect the insured by shifting the risk of loss

to the insurer”); Insurance Co. of N. Am. v. Morris , 981 S.W.2d 667 ,

(Tex. 1998)

(risk-shifting and risk-pooling “are quintessential elements of insurance

contracts”).

[14] See , e.g. , National

County

Mut . Fire Ins. Co. v.

Johnson , 879 S.W.2d 1, 2 (Tex. 1993) (family member exclusion in automobile

liability policy was against public policy); Puckett v. U.S. Fire Ins.

Co. , 678 S.W.2d 936, 938 (Tex. 1984) (aviation policy excluding coverage

based on lapse of airworthiness certificate even when lapse is causally

unrelated to loss was against public policy); Unigard Sec. Ins. Co. v. Schaefer , 572 S.W.2d

303, 306 (Tex. 1978) (automobile liability policy endorsement excluding Personal

Injury Protection coverage for one driver was against public policy); Kulubis v. Tex. Farm Bureau Underwriters Ins.

Co. , 706 S.W.2d 953, 955 (Tex. 1986) (policy covering loss to innocent

ex-spouse for damages to co-owned property was not against public

policy).

[15] See , e.g. , Burch v.

Commonwealth

County Mut . Ins. Co. , 450 S.W.2d 838, 840-841 (Tex. 1970)

(holding that a policy covering a known loss was against public policy);

Jones v. Fid. & Guar. Ins. Co. , 250 S.W.2d 281, 281-282 (Tex. Civ.

App.—Waco 1952, writ ref’d ) (policy covering innocent

ex-wife for damages caused by ex-husband to their jointly-owned property was

against public policy), overruled by Kulubis , 706 S.W.2d at 955 .

[16] See , e.g. , Hatch v.

Turner , 193 S.W.2d 668, 669-670 (Tex. 1946) (holding that public policy did

not prohibit, though it certainly did not require, a life insurance policy

provision limiting benefits to premiums paid if covered person killed in

military service in war).

[17] Equitable Life Assur . Soc’y v. Hazlewood , 12

S.W. 621, 624 (Tex. 1889) (quoting Connecticut Mut .

Life Ins. Co. v. Schaefer , 94 U.S. 457, 460 (1877)).

[18] See Stillwagoner v. Travelers Ins. Co. , 979 S.W.2d 354, 360 (Tex. App.–Tyler 1998, no

pet.).

[19] Kulubis , 706 S.W.2d at

955 .

[20] Id.

[21] Id.

[22] Texas Farmers Ins. Co. v. Murphy ,

996 S.W.2d 873, 880-881 (Tex. 1999) .

[23] Burch v. Commonwealth County Mut . Ins.

Co. , 450 S.W.2d 838, 841 (Tex. 1970).

[24] Hofer v. Lavender , 679 S.W.2d 470,

474 (Tex.

1984) (“Of course, punishment of the wrongdoer is one purpose of exemplary

damages. But, as recently as last year, we have stated that another of the

purposes of such damages is to serve as an example to others. Pace v.

State , 650 S.W.2d 64, 65 (Tex. 1983). We said the same thing in Sheffield

Division, Armco Steel Corp. v. Jones , 376 S.W.2d 825, 831 (Tex. 1964). An

earlier supreme court had concluded that exemplary damages also exist to

reimburse for losses too remote to be considered as elements of strict

compensation. Mayer v. Duke , 72 Tex. 445 , 10 S.W. 565 (1889).”); City

of Tyler v. Likes , 962 S.W.2d 489, 495 (Tex. 1997)(“For this reason, Texas

courts at one time categorized mental anguish in most types of cases as too

remote or speculative to be compensable as actual damages, holding the emotional

consequences of the tort relevant only to exemplary damages. See

Crawford v. Doggett , 82 Tex. 139 , 17 S.W. 929, 930 (1891) (citing Traweek v. Martin-Brown Co. , 79 Tex. 460 , 14

S.W. 564 , 565-66 (1890)) . . . .”); Travelers Indem . Co. of Ill. v. Fuller , 892 S.W.2d 848 , 852 n.5

(Tex. 1995) (“The history of punitive damages also reveals that the early courts

considered the remedy a part of the jury’s discretion to punish an offender who

had injured the plaintiff in some aggravated fashion. The early judges gave the

jury discretion to inflate a general damage award where the plaintiff’s

injury, though comparatively small, was inflicted in a manner which the law

sought to prevent.”).

[25] Act of June 3, 1987, 70th Leg., 1st C.S.,

ch . 2, § 2.12, 1987 Tex. Gen. Laws 37 , 44.

[26] Transportation Ins. Co. v. Moriel , 879 S.W.2d 10, 17 (Tex. 1994).

[27] Act of April 11, 1995, 74th Leg., R.S.,

ch . 19, § 1, 1995 Tex. Gen. Laws 108 , 109.

[28] Act of June 2, 2003, 78th Leg., R.S., ch . 204, § 13.02, 2003 Tex. Gen. Laws 847 , 887.

[29] Tex. Civ. Prac. & Rem. Code §

41.001(5).

[30] Act of June 3, 1987, 70th Leg., 1st C.S.,

ch . 2, § 2.12, 1987 Tex. Gen. Laws 37 , 45 (enacting §

41.002(a) to read: “This chapter applies to an action in which a claimant seeks

exemplary damages relating to a cause of action as defined by Section

33.001.”).

[31] Id . at 45 (enacting § 41.002(b) to

read: “(b) This chapter does not apply to: (1) an action brought under the

Deceptive Trade Practices-Consumer Protection Act (Subchapter E, Chapter 17,

Business & Commerce Code); (2) an action brought under Chapter 21, Insurance

Code; (3) an action brought under the workers’ compensation laws of this state

(Article 8306 et seq., Revised Statutes); (4) an action to recover exemplary

damages against an employer by the employee’s beneficiaries in a death action

arising out of the course and scope of employment where the employer is a

subscriber under the workers’ compensation laws of this state (Article 8306 et

seq., Revised Statutes); (5) an action governed by Chapter 81, Civil Practice

and Remedies Code; (6) an action brought under Chapter 246, Acts of the 63rd

Legislature, Regular Session, 1973, Home Solicitation Transactions (Article

5069-13.01 et seq., Vernon’s Texas Civil Statutes); (7) an action brought under

Chapter 547, Acts of the 63rd Legislature, Regular Session, 1973, Debt

Collection Practices (Article 5069-11.01 et seq., Vernon’s Texas Civil

Statutes); (8) an action brought under Chapter 54, 91, or 92, Property Code; (9)

an action brought under the Texas Manufactured Housing Standards Act (Article

5221f, Vernon’s Texas Civil Statutes); (10) an action brought under the Texas

Motor Vehicle Commission Code (Article 4413(36), Vernon’s Texas Civil Statutes);

(11) an action brought under the Texas Proprietary School Act, Chapter 32,

Education Code; (12) an action brought under Section 9.507 or Section 27.01,

Business & Commerce Code; (13) an action brought under Chapter 36, Family

Code; (14) an action brought under the Health Spa Act (Article 5221l, Vernon’s

Texas Civil Statutes); (15) an action brought under the Business Opportunity Act

(Article 5069-16.01 et seq., Vernon’s Texas Civil Statutes); or (16) an action

brought under the Texas Timeshare Act (Article 6573c, Vernon’s Texas Civil

Statutes).”).

[32] Act of April 11, 1995, 74th Leg., R.S.,

ch . 19, § 1, 1995 Tex. Gen. Laws 108 , 109-110. See also

Act of May 8, 1997, 75th Leg., R.S., ch . 165, § 4.01,

1997 Tex. Gen. Laws 327 , 328-329 (revising and amending § 41.002(b) to reflect

1995 amendments).

[33] Tex. Bus. & Com. Code § 15.21

(allowing injured persons and governmental entities to recover treble damages

for willful or flagrant violations of the Act).

[34] Id. §§ 17.41 -.63.

[35] See Id. § 17.50 (b) and (g)

(providing that Chapter 41, Civil Practice & Remedies Code, does not apply

to actions under this subchapter).

[36] Chapter 21 has been repealed and its

provision recodified . Act of May 22, 2003, 78th Leg.,

R.S., ch . 1274, 2003 Tex. Gen. Laws 3611 .

[37] Tex. Hum. Res. Code §§ 36.001-.132

(“Medicaid Fraud Prevention”); id . §§ 36.0011 (defining “culpable mental

state”); 36.002(defining “unlawful acts”); 36.052 (allowing the state to

recover, in addition to the payment or value of a benefit occasioned by an

unlawful act, up to two times the amount of that payment or benefit, and, in

some circumstances, other civil penalties); 36.101 (authorizing actions by

private persons on behalf of themselves and the state); 36.110 (authorizing

awards to private plaintiffs).

[38] Tex. Civ. Prac. & Rem. Code §

41.005(a).

[39] Id. § 41.005(b).

[40] Id. § 41.005(c).

[41] 307 F.2d 432, 440-441

(5th Cir. 1962).

[42] Tex. Civ. Prac. & Rem. Code §

41.003(a), (c).

[43] Id. § 41.001(6).

[44] Id. § 41.001(7).

[45] Id. § 41.001(11).

[46] Id. § 41.003(c).

[47] Id. § 41.011(a).

[48] Id. § 41.001 (11).

[49] Act of May 30, 1977, 65th Leg., R.S., ch . 817, § 31.01, 1977 Tex. Gen. Laws 2039 , 2054-2056

(adding former Tex. Ins. Code

art. 5.15-1, sections 2(2) (defining “health care provider”) and 8 (stating “No

policy of medical professional Insurance issued or renewed for a health care

provider or physician in this state may include coverage for punitive damages

that may be assessed against the health care provider.”).

[50] Id . § 1.02 (a )( 5), at 2039- 2040.

[51] See House Study Group, Bill Analysis , C.S.

H.B. 1048, 65th Leg., R.S., 5 (1977) (committee substitute) (“Exempting punitive

damages from malpractice insurance coverage will help hold down

premiums.”).

[52] The bill analyses for a 1997 amendment

suggested that the prohibition applied only to policies issued in Texas. House Research Organization, Bill

Analysis , Tex. H.B. 1170, 75th Leg., R.S., 1-2 (April 4, 1997)

(“Currently, [not-for-profit nursing] homes must purchase insurance against

punitive damages from out-of-state carriers, because only hospitals are

currently allowed to do so in Texas. . . . [The amendment] would simply allow

these homes to purchase insurance in Texas from a Texas regulated company.”);

S en. Research Ctr. [Sen. Economic Dev.

Comm.] Bill Analysis , C.S.H.B. 1170, 75th Leg., R.S., 1 (May 6, 1997)

(“Currently, the Insurance Code prohibits not-for-profit nursing homes from

purchasing punitive damage insurance coverage under medical professional

liability insurance from an admitted carrier. Not-for-profit nursing homes may

purchase such insurance from non-admitted, out-of-state carriers.”).

[53] 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 nonprofit nursing homes); Act of May 27, 2001, 77th Leg., R.S.,

ch . 1284,§ 5.02, 2001 Tex. Gen. Laws 3083 , 3085

(allowing an endorsement for for-profit nursing homes); Act of May 16, 2003,

78th Leg., R.S., ch . 141, § 2, 2003 Tex. Gen. Laws

195 , 195 (allowing an endorsement for assisted living facilities).

[54] Tex. Ins. Code § 1901.252.

[55] Id. § 462.210 (excluding from the

definition of “covered claims” against insolvent insurers under the Texas

Property and Casualty Insurance Guaranty Act “any punitive, exemplary, extracontractual , or bad-faith damages awarded in a court

judgment against an insured or insurer”); § 462.302(c) (“The [Texas Property and

Casualty Insurance Guaranty Association] is not liable for . . . a claim for . .

. exemplary damages . . . .”); § 463.204 (stating that the Life, Accident,

Health, and Hospital Service Insurance Guaranty Association cannot pay punitive

or exemplary damages); § 2203.154 (“The [Medical Liability Insurance Joint

Underwriting Association] may not issue or renew a medical liability insurance

policy for a physician or health care provider under this chapter that includes

coverage for punitive damages assessed against the physician or health care

provider.”); § 2205.253(b) (“Money in the [Texas Child-Care Facility Liability

Fund] may not be used to pay . . . (1) punitive damages . . . .”); § 2207.353(c)

(“Money in the [Excess Liability Fund for Counties and Certain Educational

Entities] may not be used to pay . . . (1) punitive damages . . . .”); §

2208.252(b) (“Money in the [Texas Public Entity Excess Insurance Fund] may not

be used to pay: (1) punitive damages . . . .”); § 2208.303 (“Excess insurance

coverage provided by the [Texas Public Entity Excess Insurance Pool] may not

include coverage for punitive damages.”); § 2209.303 (“Liability insurance

coverage provided by the [Texas Nonprofit Organizations Liability Pool] may not

include coverage for punitive damages.”); § 2602.255(4) (excluding “exemplary,

extracontractual , or bad faith damages awarded against

an insured or title insurance company by a court judgment” from “covered claims”

against the Texas Title Insurance Guaranty Association); § 2209.253(b) (“Money

in the [Texas Nonprofit Organizations Liability Fund] may not be used to pay:

(1) punitive damages . . . .”); § 2209.303 (“Liability insurance coverage

provided by the [Texas Nonprofit Organizations Liability Pool] may not include

coverage for punitive damages.”).

[56] Act of June 3, 1987, 70th Leg., 1st C.S.,

ch . 1, § 1.01, 1987 Tex. Gen. Laws 1 , 4.

[57] Tex. Ins. Code § 38.154(a)(3)(C)(ix)

(for claims over $25,000), §38.156(3)(B)(iv) (for claims over $10,000 but under

$25,000). These reports are analyzed on the Department’s website at

http://www.tdi.state.tx.us/reports/report5.html.

[58] The 1998 report showed that for over 5,000

commercial liability claim settlements greater than $25,000, a third were

influenced by either non -economic damages, exemplary

damages, or prejudgment interest, and of the total paid on those claims, 9% was

attributed to exemplary damages. For over 4,000 settlements between $10,000 and

$25,000, 5% were influenced by exemplary damages, and of the total paid on those

claims, 6% was attributed to exemplary damages. For cases tried to a verdict,

11% of the amounts awarded were for punitive damages. Texas Dep’t of Ins., 1998 Texas Liability

Insurance Closed Claim Report 2, 5-6, 17 (1998).

The influence of exemplary damages on such settlements

declined fairly steadily through 2005. The report for that year showed that for

5,440 commercial liability claim settlements greater than $25,000, a fifth were

influenced by non-economic damages, exemplary damages, or prejudgment interest,

and of the total paid on those claims, 2% was attributed to exemplary damages.

For settlements between $10,000 and $25,000, 0.15% were influenced by exemplary

damages, and of the total paid on those claims, 2% was for exemplary damages.

For cases tried to a verdict, 4% of the amounts awarded were for punitive

damages. Texas Dep’t of Ins., 2005 Texas

Liability Insurance Closed Claim Report 2, 5-6, 17

(2005).

[59] For example, the Texas Tort Claims Act does

not waive governmental immunity from punitive damages, Tex. Civ. Prac. & Rem. Code §

101.024, but the Act does not apply to liability for proprietary functions. The

State and its subdivisions, such as counties, do not engage in proprietary

junctions, Bennett v. Brown County Water Improvement Dist. No. 1 , 272

S.W.2d 498 (Tex. 1954), but municipalities do, and when they do: “As a general

rule a municipality may not be held liable for exemplary damages; however, if

the plaintiff can show that there is intentional, willful, or grossly negligent

conduct which shows an entire want of care to his rights and that such conduct

can be imputed directly to the governing body of the municipality, exemplary

damages may be recovered.” City of Gladewater v. Pike , 727 S.W.2d 514,

522 (Tex. 1987). The Legislature may authorize punitive damages against the

government, as it once did in the Whistleblower Act, Act of May 30, 1983, 68th

Leg., R.S., ch . 832, § 4, 1983 Tex. Gen. Laws 4751 ,

4752, before it changed its mind, Act of May 25, 1995, 74th Leg., R.S., ch . 721, § 3, 1995 Tex. Gen. Laws 3812 , 3812 (codified at

Tex. Gov’t Code § 554.003(a)).

The government is not liable for punitive damages for employment discrimination.

Tex. Lab. Code §

21.2585.

[60] See , e.g. , Tex Ins. Code § 2301.003(b) (“This

subchapter applies to all lines of the following kinds of insurance written

under an insurance policy or contract issued by an insurer authorized to engage

in the business of insurance in this state: (1) general liability insurance; (2)

residential and commercial property insurance, including farm and ranch

insurance and farm and ranch owners insurance; (3) personal and commercial

casualty insurance, except as provided by Section 2301.005; (4) medical

professional liability insurance; (5) fidelity, guaranty and surety bonds other

than criminal court appearance bonds; (6) personal umbrella insurance; (7)

personal liability insurance; (8) guaranteed auto protection (GAP) insurance;

(9) involuntary unemployment insurance; (10) financial guaranty insurance; (11)

inland marine insurance; (12) rain insurance; (13) hail insurance on farm crops;

(14) personal and commercial automobile insurance; (15) multi-peril insurance;

and (16) identity theft insurance issued under Chapter.”); id . §

2301.006(a) (“Except as provided by Section 2301.008, an insurer may not deliver

or issue for delivery in this state a form for use in writing insurance

described by Section 2301.003 unless the form has been filed with and approved

by the commissioner.”); id .§ 2301.008 (“The commissioner may adopt

standard insurance policy forms, printed endorsement forms, and related forms

other than insurance policy forms and printed endorsement forms, that an insurer

may use instead of the insurer's own forms in writing insurance subject to this

subchapter.”).

[61] Tex

Ins. Code § 2052.002(a) (“The commissioner shall prescribe standard

policy forms and a uniform policy for workers’ compensation

insurance.”).

[62] Dairyland County Mut .

Ins. Co. v. Wallgren , 477 S.W.2d 341, 342 (Tex.

Civ. App.–Fort Worth 1972, writ ref’d n.r.e .); Manriquez v.

Mid-Century Ins. Co. , 779 S.W.2d 482, 484-485 (Tex. App.–El Paso 1989, writ

denied), disapproved in part on other grounds , Trinity Universal Ins.

Co. v. Cowan , 945 S.W.2d 819, 822-824 (Tex. 1997).

[63] Milligan v. State Farm Mut . Auto. Ins. Co. , 940 S.W.2d 228, 231-232 (Tex.

App.–Houston [14th Dist.] 1997, writ denied), overruling Home Indem . Co. v. Tyler , 522 S.W.2d 594 (Tex. Civ.

App.–Houston [14th Dist.] 1975, writ ref’d , n.r.e .); State Farm Mut . Auto.

Ins. Co. v. Shaffer , 888 S.W.2d 146 (Tex. App.–Houston [1st Dist.] 1994,

writ denied); Vanderlinden v. USAA Prop. and

Cas . Ins. Co. , 885 S.W.2d 239, 242 (Tex.

App.–Texarkana 1994, writ denied); Government Employees Ins. Co. v. Lichte , 792 S.W.2d 546, 549 (Tex. App.–El Paso 1990),

writ denied, 825 S.W.2d 431 (Tex. 1991) (per curiam ).

[64] See, e.g ., DaimlerChrysler Ins.

Co. v. Apple , ___ S.W.3d ___ (Tex. App.–Houston [1st Dist.] 2007) (CGL and

umbrella policies) (policies provided coverage for claims for "personal injury,"

which was defined to oral publication of libelous material, but excluded

coverage for publication of material done by or at the direction of the insured

with knowledge of its falsity); Westchester Fire Ins. Co. v. Admiral Ins.

Co., 152 S.W.3d 172, 181-182, 185-190 (Tex. App.–Fort Worth, 2004, pet.

pending) (for-profit nursing home) (insurer agreed to pay “those sums which the

insured shall become legally obligated to pay as damages because of bodily

injury to any person arising out of the rendering of or failure to render,

during the policy period . . . professional services” including nursing care);

American Home Assur . v. Safway Steel Prods. Co. , 743 S.W.2d 693, 701-702 (Tex.

App.–Austin 1987, writ denied) (umbrella policy); Ridgway v. Gulf Life Ins.

Co., 578 F.2d 1026, 1029 (5th Cir. 1978) (commercial vehicle

policy).

[65] Tex. Lab. Code § 408.001(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.”).

[66] Tex. Const. art. XVI, § 26 (“Every

person, corporation, or company, that may commit a homicide, through wilful act, or omission, or gross neglect, shall be

responsible, in exemplary damages, to the surviving husband, widow, heirs of his

or her body, or such of them as there may be, without regard to any criminal

proceeding that may or may not be had in relation to the homicide.”). The action

is correspondingly recognized by the Workers’ Compensation Act. Tex. Lab. Code § 408.001(b) (“This

section [providing an exclusive remedy for injured employees] 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.”).

[67] See sources cited, supra note

63.

[68] Shaffer , 888 S.W.2d at 149

(citations omitted).

[69] 477 S.W.2d 341 (Tex. Civ. App.–Fort Worth

1972, writ ref’d n.r.e .).

[70] Id . at 342-343.

[71] 779 S.W.2d 482, 484-485 (Tex. App.—El Paso

1989, writ denied), disapproved in part on other grounds , Trinity

Universal Ins. Co. v. Cowan , 945 S.W.2d 819 (Tex. 1997).

[72] 578 F.2d 1026 , 1029 (5th Cir.

1978).

[73] Home Indemnity Co. v. Tyler , 522 S.W.2d 594

(Tex. Civ. App.–Houston [14th Dist.] 1975, writ ref’d ,

n.r.e .), overruled by Milligan v. State Farm

Mut . Auto. Ins. Co. , 940 S.W.2d 228, 232 (Tex.

App.–Houston [14th Dist.] 1997, writ denied).

[74] Ridgeway , 578 F.2d

at 1029 -1030 .

[75] Milligan ,

940 S.W.2d at 232 .

[76] 19 F. Supp. 2d 678, 696 (N.D. Tex. 1998).

[77] 743 S.W.2d 693, 695-696 (Tex. App.–Austin

1987, writ denied).

[78] Id. at 695 .

[79] Id . at 704.

[80] Id.

[81] Id.

[82] Id. (italics omitted).

[83] Lunsford v. Morris , 746 S.W.2d 471,

473 (Tex.

1988).

[84] ___ S.W.3d ___ (Tex. App.–Houston [1st

Dist.] 2007) (cause no. 01-05-01115-CV) (pending on motion for

rehearing).

[85] Id . at ___ & n.4; see

also Hammerly Oaks, Inc. v. Edwards ,

958 S.W.2d 387, 391 (Tex. 1997) (stating that “the general rule in Texas” is set

out in Restatement of Torts § 909

(1939): “Punitive damages can properly be awarded against a master or other

principal because of an act by an agent if, but only if, (a) the principal

authorized the doing and the manner of the act, or (b) the agent was unfit and

the principal was reckless in employing him, or (c) the agent was employed in a

managerial capacity and was acting in the scope of employment, or (d) the

employer or a manager of the employer ratified or approved the act.”).

[86] DaimlerChrysler v. Apple , ___ at

___.

[87] Id .

[88] Id . at ___ (citations

omitted).

[89] Memorial Med. Ctr. of E. Tex. v. Keszler , 943 S.W.2d

433, 435 (Tex.

1997) (per curiam ) (“The court of appeals held that

such a release is against public policy [citing Smith v. Golden Triangle

Raceway , 708 S.W.2d 574, 576 (Tex. App.–Beaumont 1986, no writ)]. However,

the court of appeals failed to distinguish a pre-accident waiver of liability

from a post-injury release made in settlement of claims. In Golden

Triangle , the issue was whether a pre-injury release could effectively

dispense with a claim of gross negligence. The court found a pre-injury release

of gross negligence invalid as against public policy. [ Golden Triangle ,

708 S.W.2d at 576 .] We have never held post-injury releases of gross negligence

claims invalid. There is no logic in prohibiting people from settling existing

claims. Significantly, such a rule would preclude settlement of many such

claims. The court of appeals erred in holding that [the plaintiff] could not

release his gross negligence claim against [the defendant].”(citations

omitted)).

[90] Webb v. Lawson-Avila Constr., Inc. ,

911 S.W.2d 457, 461-462 (Tex. App.–San Antonio 1995, writ dism’d w.o.j .) (“Appellants argue

that indemnity for one’s own gross negligence, in a non-insurance context, is

violative of public policy. . . . [T]here is nothing

in the record or in the law which would allow us to ignore [an indemnity

provision’s] plain meaning. The record reveals nothing other than an arm’s

length transaction between two business entities, and we must fairly and

reasonably interpret the contract. . . . [Whether the provision is against

public policy] is a matter better left to the Legislature or the ruling of our

Supreme Court.”).

[91] Atlantic Richfield Co. v. Petrol. Pers.,

Inc. , 768 S.W.2d 724 , 726 n.2 (Tex. 1989) (“We do not decide whether

indemnity for one’s own gross negligence or intentional injury may be contracted

for or awarded by Texas courts. This issue is not presented in this

[case].”).

[92] Alabama, Alaska, Arizona, Delaware,

Georgia, Hawaii, Idaho, Maryland, Mississippi, Montana, New Hampshire, New

Mexico, North Carolina, South Carolina, Tennessee, Vermont, Washington,

Wisconsin, and Wyoming.

[93] Arkansas,

Kentucky, Iowa, Louisiana,

Nevada, Oregon, Virginia, and

West

Virginia.

[94] California, Connecticut,

Florida, Illinois, Indiana,

Kansas, Kentucky, Minnesota,

New Jersey, Oklahoma, and Pennsylvania.

[95] Colorado,

New York, North

Dakota, Ohio, Rhode Island, South

Dakota, and Utah.

[96] Maine,

Massachusetts, Michigan, Missouri, and

Nebraska.