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While the Texas Supreme Court has yet to address the controversial issue, on June 9 the 5th U.S. Circuit Court of Appeals heard arguments in a case that could determine whether insuring for punitive damages is against public policy in Texas. The case, Fairfield Insurance Co. v. Stephens Martin Paving, involves a federal declaratory judgment action arising from a wrongful-death case that’s pending in Abilene, Texas’ 42nd State District Court. David M. Pruessner, a lawyer with Dallas’ Law Office of David M. Pruessner who represents Fairfield, says the outcome of the appeal not only could have a dramatic impact on workers’ compensation insurance rates in Texas, but also could determine whether insurance companies have a duty to defend cases in which gross negligence is alleged. Under Texas’ workers’ compensation laws, the only way the survivors of a deceased employee can get punitive damages from an employer is if they prove in state court that the company was grossly negligent. However, Fairfield Insurance Co., the Connecticut-based company insurance carrier that provides Stephens Martin’s liability insurance, believes a trend in Texas case law prohibits providing insurance for punitive damages. Not only that, the insurance company believes that it has no duty to pay for its attorneys to defend the case. So the insurance company took the matter to the 5th Circuit for a ruling last year, taking advantage of the court’s diversity of parties jurisdiction, Pruessner says. Michael Cooper, a Salado solo who represents the widow, Carrie Bennett, argued during the hearing that Fairfield Insurance Co. should be bound by the liability policy it signed with Stephens Martin; it clearly covers punitive damages, he alleges. And Stephens Martin’s attorney, Charles C. Self III, a partner in Abilene’s Whitten & Young, argued at the hearing that Fairfield Insurance Co. has a duty to defend and must indemnify the claims. Self points to the most recent Texas appellate opinion on the subject, Westchester Fire Insurance Co. v. Admiral Insurance Co., a June 26, 2003, opinion from Fort Worth, Texas’ 2nd Court of Appeals, which found that insuring for punitive damages does not violate public policy. In Westchester Fire, the Fort Worth court found that insuring for punitive damages is not against public policy because neither the Texas Supreme Court nor the Texas Legislature have spoken on the issue. However, the Fort Worth court heard the case again en banc in October and has yet to issue another opinion. But on Aug. 25, 2003, U.S. District Court Judge Sam Cummings of Lubbock took heed of Westchester Fire when he ruled that insuring for punitive damages is not against Texas public policy. Cumming also ruled that Fairfield Insurance Co. has a duty to defend Stephens Martin in the state-court, wrongful-death case, a decision Fairfield appealed to the 5th Circuit. DECIDE OR CERTIFY? As the three attorneys representing parties in Fairfield stepped into the nearly empty en banc courtroom at the 5th Circuit, there was one big uncertainty looming over all of their heads. Because the Texas Supreme Court has not ruled on whether insuring for punitive damages is against public policy, the three-member 5th Circuit panel is forced to guess on how the state’s highest civil court would rule on the issue. And because of that unusual position, the 5th Circuit could certify the case, meaning the court might send the question directly to the Texas Supreme Court for an answer, rather than handle it themselves. It’s a maneuver that the 5th Circuit rarely uses. As Fairfield Insurance Co.’s lawyer took the podium to argue the case, he acknowledged that for the 5th Circuit to arrive at a conclusion, the court would have to guess what the Texas Supreme Court would make of the issue. He also acknowledged that in 1978′s Ridgway v. Gulf Life Insurance Co., the 5th Circuit found that insurance companies were not precluded from insuring against punitive damages. But Pruessner, who represents Fairfield, argued that Texas law has changed since Ridgway. Pruessner’s appeal is built around Transportation Insurance Co. v. Moriel, a landmark 1994 Texas Supreme Court decision in which the court found that punitive damages are intended to punish a defendant and are not meant to further compensate a plaintiff in a tort case. Based on Moriel, insurance companies should not be indemnifying or defending punitive damages, Pruessner argued. During the argument, 5th Circuit Judge Edith Jones seemed skeptical that the federal appeals court should be deciding something that might be best left to the Texas Supreme Court. “I’m very sympathetic of your argument,” Jones told Pruessner. “But we have our own old case, Ridgway. We’re bound by Ridgway. And the only way that I think you can get where you’re going is to go to the Texas Supreme Court.” However, the two other judges on the panel, E. Grady Jolly and W. Eugene Davis, seemed more interested in the specifics of the insurance policy that Fairfield had with Stephens Martin. “Why isn’t the best way to handle this contractually?” Davis asked Pruessner. “If they don’t want to cover [punitive damages], don’t.” Self, the attorney for Stephens Martin, told the panel that punitive damages are covered according to the policy, and the law of the 5th Circuit and the 2nd Court of Appeals in Fort Worth. “The question is whether or not the policy covers punitive damages,” Self argued. “And under Ridgway and Westchester Fire, the answer is yes.” Cooper told the panel that Fairfield should be bound by the policy it granted to Stephens Martin. After the argument, the lawyers disagreed on whether the panel would decide the issue themselves or pass it off to the Texas Supreme Court. Pruessner and Self believe the court eventually may certify the case to the Supreme Court. Cooper isn’t so sure. “Davis and Jolly, I think, are pretty strong that if a company wants to contract with a carrier, they should be allowed to do that,” Cooper says. HIGH STAKES Several appellate attorneys watching Fairfield believe that it’s interesting that the 5th Circuit seems to have jumped ahead of the Supreme Court on the controversial issue. But one of the appellate attorneys believes that a 5th Circuit ruling on the controversial issue would not necessarily be permanently binding on state trial and appellate courts. “Certainly, anything the 5th Circuit does is going to be powerful precedent,” says Robert Allen, a partner in the Dallas office of Baker & McKenzie who represents an insurance company in the Westchester Fire case. “But the rules of stare decisis [do] not require a state court to take what the 5th Circuit says as the same as what the Texas Supreme Court would say. It would not require the Fort Worth court to rule one way or the other” on Westchester Fire, Allen says. David Schenck, a partner in Dallas’ Hughes & Luce, believes the easiest course of action for the 5th Circuit is to send the case to the Texas Supreme Court. “It would be simplest way to do it,” Schenck says. “But the Texas Supreme Court doesn’t have to take it.” And if the case is certified, it’s unlikely that the Texas Supreme Court would refuse to hear the case, says Deborah Hankinson, a Dallas solo and former justice on Texas’ highest civil court. “I don’t know of any case in which the Supreme Court of Texas has refused to take that the 5th Circuit has sent them,” Hankinson says. Trial attorneys who regularly handle gross-negligence cases against employers are also watching Fairfield with interest; it’s a decision which they believe could have a high-stakes outcome for businesses and insurance companies who write policies in Texas. The issue that interests litigators the most is Fairfield’s position that the company has no duty to defend a gross-negligence case. “I think when a insurance company makes a decision that there is no duty to defend, that’s a different question. That’s far beyond,” says David Bright, who’s of counsel at Corpus Christi’s Watts Law Firm and regularly files gross-negligence cases for plaintiffs. “That is cutting someone adrift,” Bright says. “I mean, indigent criminal defendants are entitled to a lawyer, let alone a company that pays insurance premiums.”

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