Fairfield Ins. v. Stephens Martin Paving

Citation246 S.W.3d 653
Decision Date15 February 2008
Docket NumberNo. 04-0728.,04-0728.
PartiesFAIRFIELD 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.
CourtTexas Supreme Court

David M. Pruessner, Jes Alexander, The Law Offices of David M. Pruessner, Dallas TX, for appellant.

Charles C. Self III, Whitten & Young, P.C., Abilene TX, for appellee.

Michael R. Cooper, Salado TX, for Intervenor.

Wade Caven Crosnoe, Thompson Coe Cousins & Irons, L.L.P., Austin, TX, G. Andrew Veazey, Huval Veazey Felder & Aertker, LLC, Lafayette, LA, Macey Reasoner Stokes, Baker & Botts L.L.P., Robert M. Roach Jr., Cook & Roach, L.L.P., Houston, Robert D. Allen, Meckler Bulger & Tilson LLP, Dallas, Kathleen Hopkins Alsina, Phelps Dunbar, L.L.P., Houston, P.M. Schenkkan, Graves Dougherty Hearon & Moody, P.C., Austin, Fred A. Simpson, Jackson Walker L.L.P., Randall L. Smith, Houston, E. Thomas Bishop, Bishop & Hummert, P.C., Dallas, Mark L. Kincaid, Kincaid, Horton & Smith, Austin, TX, for Amicus Curiae.

Justice WAINWRIGHT delivered the opinion of the Court, joined by Chief Justice JEFFERSON, Justice HECHT, Justice O'NEILL, Justice BRISTER, Justice MEDINA, Justice GREEN, and Justice WILLETT, and by Justice JOHNSON as to sections I, II, and IV only.

This case is before the Court on a certified question from the United States Court of Appeals for the Fifth Circuit: "Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?" Fairfield Ins. Co. v. Stephens Martin Paving, LP, 381 F.3d 435, 437 (5th Cir.2004). Pursuant to article V, section 3-c of the Texas Constitution and rule 58.1 of the Texas Rules of Appellate Procedure, we answer that Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case.


Stephens Martin Paving, a highway paving company, employed Roy Edward Bennett as a brooming machine operator. On December 20, 2002, Bennett died as a result of injuries that occurred when a brooming machine rolled over. Stephens Martin Paving carried a workers' compensation and employer's liability insurance policy, issued by Fairfield Insurance Company. Fairfield paid workers' compensation benefits to Bennett's wife and children under the policy in accordance with Texas workers' compensation law.

On January 24, 2003, Bennett's survivors sued Stephens Martin Paving for gross negligence, seeking exemplary damages because Stephens Martin Paving allegedly failed to provide a safe place to work failed to follow and enforce OSHA safety rules and regulations, and failed to properly train and supervise its employees. Having received workers' compensation benefits, Bennett's survivors are barred by statute from recovering actual damages and seek only exemplary damages in the suit.1

On February 24, 2003, Fairfield sued Stephens Martin Paving and Bennett's survivors in federal district court, seeking a declaratory judgment that Fairfield owed no duty to defend or indemnify Stephens Martin Paving in the suit for exemplary damages. Relying on Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026, 1029 (5th Cir.1978), the federal district court concluded that the language in Fairfield's policy covers exemplary damages and that Texas public policy does not prohibit insurance coverage of those damages. The court denied Fairfield's motion for summary judgment and entered a judgment declaring that Fairfield has a duty to defend Stephens Martin Paving and a duty to indemnify Stephens Martin Paving as provided by the policy if Stephens Martin Paving is adjudicated responsible for the damages sought in the underlying suit brought by Bennett's survivors (either by judgment or settlement). Fairfield appealed, and the Fifth Circuit certified to this Court the question of the insurability of exemplary damages for gross negligence. Fairfield Ins. Co., 381 F.3d at 437; TEX.R.APP. P. 58.1.


Determining whether exemplary damages for gross negligence are insurable requires a two-step analysis. See, e.g., Grinnell Mut. Reinsurance Co. v. Jungling, 654 N.W.2d 530, 535-37 (Iowa 2002); Fluke Corp. v. Hartford Accident & Indem. Co., 145 Wash.2d 137, 34 P.3d 809, 814 (Wash.2001); Brown v. Maxey, 124 Wis.2d 426, 369 N.W.2d 677, 685 (1985). First, we decide whether the plain language of the policy covers the exemplary damages sought in the underlying suit against the insured.

Second, if we conclude that the policy provides coverage, we determine whether the public policy of Texas allows or prohibits coverage in the circumstances of the underlying suit. We first look to express statutory provisions regarding the insurability of exemplary damages to determine whether the Legislature has made a policy decision. See Town of Flower Mound v. Stafford Estates Ltd. P'ship, 135 S.W.3d 620, 628 (Tex.2004) ("Generally, `the State's public policy is reflected in its statutes.'") (quoting Tex. Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240, 250 (Tex. 2002)); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 873 (Tex.2000). If the Legislature has not made an explicit policy decision, we then consider the general public policies of Texas.


The policy Fairfield issued to Stephens Martin Paving contains two types of insurance: workers' compensation insurance and employer's liability insurance. Under the workers' compensation part of the policy, Fairfield agrees to pay the benefits that Stephens Martin Paving is required to pay by Texas workers' compensation law and other enumerated costs. In this case, the parties agree that the policy covers the workers' compensation benefits paid to the Bennetts. The workers' compensation part of the policy makes the employer responsible for "any payments in excess of the benefits regularly provided by the workers compensation law including those required because: 1. of your serious and willful misconduct; ... 3. you fail to comply with a health or safety law or regulation."

Under the employer's liability part of the policy, Fairfield agrees to pay "all sums [Stephens Martin Paving] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance" and other specific costs. It excludes coverage of "punitive or exemplary damages because of bodily injury to an employee employed in violation of law." An endorsement to the policy adds that "[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury." The policy also excludes damages arising from injuries caused by intentional acts.

The Bennetts' claim against Stephens Martin Paving seeks only exemplary damages for gross negligence. Therefore, the coverage issue in this case concerns only the employer's liability part of the policy and not the part of the policy regarding workers' compensation benefits. Because the Fifth Circuit's question is directed only at the public policy of Texas, we limit our discussion to the second prong of the analysis and presume that the policy language covers the exemplary damages sought.


When considering whether public policy should prohibit the coverage of exemplary damages in a particular case, courts should study the contexts in which the Legislature has spoken. In a few instances, the Legislature has expressly prohibited or otherwise limited the availability of such insurance.

Health Care Providers: Article 5.15-1, section 8 of the Texas Insurance Code prohibits insurance coverage of exemplary damages assessed against health care providers and physicians, creating an exception for a subset of healthcare providers including hospitals, nursing homes, and assisted living facilities:

No policy of medical professional liability insurance issued to or renewed for a health care provider or physician in this state may include coverage for exemplary damages that may be assessed against the health care provider or physician; provided, however, that the commissioner may approve an endorsement form that provides for coverage for exemplary damages to be used on a policy of medical professional liability insurance issued to a hospital, as the term "hospital" is defined in this article, or to a for-profit or not-for-profit nursing home or assisted living facility.

TEX. INS.CODE art. 5.15-1, § 8.2

Guaranty Funds and Excess Liability Pools: The Legislature has explicitly excluded risk management and excess insurance pools for various public entities3 from paying exemplary damages.4 In 1989, the Legislature amended the Texas Property and Casualty Insurance Guaranty Act to exclude from the definition of "covered claims" against insolvent insurers "any punitive, exemplary, extracontractual, or bad faith damages awarded in a court judgment against an insured or insurer."5 The Legislature has included the same prohibition for several other such entities covering exceptional risks.6 In each instance the Legislature's concern appears to have been for the financial impact on these entities of insurance for exemplary damages.7

The Legislature is aware of and sensitive to issues of insurance coverage of exemplary damages. It has made the policy decision to prohibit insurance coverage of those damages in selected circumstances.


This Court has recognized that "the administration of the workers' compensation system is heavily imbued with public policy concerns." Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553 (Tex.2001), superseded by statute, TEX. LAB.CODE § 406.003(e), as explained in...

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