The purpose of exemplary damages is to punish someone for wrongful conduct. So, should an insurance company be required to pay for exemplary damages when the policy does not provide coverage for exemplary damages?
This issue was addressed in a 2020, Western District of Texas, San Antonio Division, opinion styled, Richard Brett Frederking v. Cincinnati Insurance Company.
Frederking had been seriously injured in an auto accident wherein Carlos Sanchez, while driving for his employer, caused the wreck while driving while intoxicated (DWI). The case went to trial and Frederking was paid for his injuries and the jury also awarded exemplary damages of $207,550.00. The insurer, Cincinnati paid the injuries portion of the judgement but refused to pay the exemplary damages and this lawsuit for that amount resulted.
Cincinnati moved for summary judgement arguing that Texas public policy precludes Cincinnati from indemnifying Sanchez for the punitive damages award. Cincinnati argues: punitive damages are not insurable under the [Policy] because, as a matter of Texas public policy, Sanchez alone is responsible for the punitive burdens of his grossly negligent acts.
The question for this Court was whether or not Texas public policy prohibit the coverage of exemplary damages in this case.
Responding to a question certified from the Fifth Circuit, the Texas Supreme Court answered that Texas public policy does not prohibit insurance coverage of exemplary damages for gross negligence in workers’ compensation cases. The court’s reasoning relied on the expressed intent of the legislature in workers’ compensation cases. Outside of that specific context,the court also laid out “some of the considerations relevant to determining whether Texas public policy prohibits insurance coverage of exemplary damages … in the absence of a clear legislative policy decision.” According to Texas case law “whether a promise or agreement will be unenforceable on public policy grounds will be determined by weighing the interest in enforcing agreements versus the public policy interest against such enforcement.”
In weighing those interests, “on one side of the scale is Texas’ general policy favoring freedom of contract …. On the other side of the scale is the extent to which the agreement frustrates important public policy.” Although Texas’ strong public policy in favor of preserving freedom of contract is well-recognized, “freedom of contract is not unbounded,” and “parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.” Accordingly, courts determining whether public policy prohibits insurance coverage of exemplary damages for gross negligence “should consider the purpose of exemplary damages.”
In Texas, “exemplary damage awards serve to punish the wrongdoer and set ‘a public example to prevent the repetition of the act.’” And as Texas law has recognized, Texas public policy has more recently been to “downplay the role of deterrence and focus squarely on the punitive aspect” of exemplary damages. It is also Texas policy that “the punishment imposed through exemplary damages is to be directed at the wrongdoer.”
The specific question here is whether Texas public policy prohibits an employer’s insurance policy from covering exemplary damages for gross negligence of an employee who caused an injury while driving drunk. The Fifth Circuit has held that Texas public policy prohibited insurance coverage of the exemplary damages award. The Court explained thusly:
It is unnecessary to announce a broad rule in order to decide this case. The application of Fairfield in this case is straightforward. This accident represented [the driver’s] third DWI conviction. [The driver], then, was a repeat offender who clearly had not learned his lesson. By his own admission, he knew he was a “danger to the folks on the highway” driving around drunk in an 18-wheeler and that it was “possible someone might get hurt.” Under the facts of this case, Texas public policy prohibits [the employer’s insurer] from indemnifying the exemplary damages award here. Any exemplary damages must therefore be recovered from [the driver] himself and not from [the insurer].
The Court finds that in this case Texas public policy prohibits the indemnification of the exemplary damages award against Sanchez for his own gross negligence. Cincinnati did in fact pay Sanchez’s portion of the damages inasmuch as they were compensatory of Frederking’s injuries. But the exemplary damages awarded against Sanchez in order to punish and deter his own grossly negligent conduct must be borne by Sanchez alone, not by his employer’s insurer.