The issue of whether or not punitive damages are covered under a liability policy is very important in a case where punitive damages are being sought by an injured party.
The State Bar of Texas, Insurance Section, published an article discussing this issue. The article is titled, Texas Law And The Restatement Of The Law Of Liability Insurance: An Initial Comparison Of Blackletter Principles.
Here is what it tells us.
The Restatement of Law largely leaves the issue of coverage for punitive damages to the respective states.
At least for Texas, determining whether exemplary damages are insurable requires a two-step analysis. First, courts decide whether the plain language of the policy covers the exemplary damages sought in the underlying lawsuit against the insured. This is discussed in the Texas Supreme Court opinion, Fairfield Ins. Co. v. Stephen Martin Paving. Second, if the policy language provides coverage, courts determine whether the public policy of Texas allows or prohibits coverage in the circumstances of the underlying suit. Courts first look to express statutory provisions regarding the insurability of exemplary damages to determine whether the Legislature has made a policy decision. If the Legislature has not made an explicit policy decision, it will then consider the general public polices of Texas.
Looking at the Restatement, it contains the following section for certain serious offences:
§ 45. Insurance of Liabilities Involving Aggravated Fault
(1) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for defense costs incurred in connection with any legal action is enforceable, including but not limited to defense costs incurred in connection with: a criminal prosecution; an action seeking fines, penalties, or punitive damages; and an action alleging criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.
(2) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for civil liability arising out of aggravated fault is enforceable, including civil liability for: criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.
(3) Whether a term in a liability insurance policy provides coverage for the defense costs and civil liability addressed in subsections (1) and (2) is a question of interpretation governed by the ordinary rules of insurance policy interpretation.