Exemplary Damages In Insurance

Texans in Grand Prairie, Arlington, Dallas, Fort Worth, Mansfield, Duncanville, De Soto, Cedar Hill, Mesquite, Richardson, Garland, and other places in Dallas County will rarely find themselves in a position wherein they are making a claim for exemplary damages but would be surprised how often they are close to being able to make that claim. Think about this – If someone injures you in a car wreck and the person has been drinking, then you have a claim against that person for your injuries plus a claim for exemplary damages. So how does that work?
The Fort Worth Court of Appeals had a case in December 2004, which discussed exemplary damages. The style of the case is Westchester Fire Insurance Company v. Admiral Insurance Company. Here is some background.
In 1994, PeopleCare Heritage Western Hills, Inc. (PeopleCare), the owner of Heritage Western Hills Nursing Home had a primary policy with Admiral with limits of $1,000,000 and an excess policy with Westchester with limits of $10,000,000. Beulah Cagle was a patient at Western Hills. In December 1994, Beulah (Beulah had been allowed to lie in a urine soaked bed for extended periods of time) and her daughter Lola sued PeopleCare under several legal theories including gross negligence.
After a trial to the Judge, the Judge ruled in favor of Beulah and Lola for an amount that exceeded the primary policy. The court then scheduled a hearing on exemplary damages. Before the hearing, PeopleCare settled the Cagle’s suit for an amount exceeding the compensatory damages, with Admiral tendering its policy limits, less defense costs and PeopleCare’s deductible, and Westchester contributing the remainder.
Westchester then sued Admiral alleging , among other things, that Admiral negligently failed to settle the Cagles’ claims against PeopleCare with the limits of the primary insurance policy. The court in this second case ruled that “insurance coverage for punitive damages, now and at the time in question, violates the public policy of the State of Texas. Accordingly, coverage for punitive damages under the Admiral insurance policy is void ….”
The issue for this appeals court to resolve was whether the trial court erroneously relied on a federal case construing Texas law in determining that insurance coverage for punitive damages at the time the Cagle cause of action arose or was settled was void as against public policy.
This appeals court overruled the trial court and stated, “…We hold that insurance coverage under Admiral’s policy for the punitive damages awarded to the Cagles and against PeopleCare was not void as against the public policy of Texas at that time. Because insurance coverage for punitive damages under Admiral’s policy was not void as against public policy at the relevant time, the trial court erred in determining that the Admiral policy did not provide coverage for punitive damages: …”
In discussing this case the court heard arguments that punitive damages / exemplary damages are for the purposes of punishing the wrongdoer and that if the insurance company has to pay the punitive damages, then the wrongdoer is not being punished or deterred from the wrongful conduct that gives rise to the exemplary damages. The court did a good job of reviewing the laws in this area and the legislative intent and legislative history of these insurance laws. The court also distinguished the other cases dealing with this subject matter. And they looked at what the Texas Supreme Court has declared regarding exemplary damages in insurance policies.
One area where exemplary damages is not allowed to be covered by the insurance company is uninsured and underinsured motorist coverage. In these coverages exemplary damages are not allowed for the reason that the wrongdoer is not punished at all. Whereas in the insurance at issue here, these commercial policies are a cost of doing business and a business that does not conduct itself in a proper manner has vastly increased coverage costs.
The case is a long opinion and a good read for trying to understand how the courts look at exemplary damages coverage in insurance policies.