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The Texas Supreme Court heard arguments last week in a high-stakes dispute that pits insurance companies against the businesses that buy their policies. The issue of first impression the parties asked the court to decide is whether insuring for punitive damages is against public policy in Texas. The opinion in the highly watched case will address who pays for punitive damages — insurance companies that sometimes cover those costs in general liability policies or the tortfeasors who are supposed to be punished by those damages. Fairfield Insurance Co. v. Stephens Martin Paving involves a certified question sent to the high court earlier this year by the 5th U.S. Circuit Court of Appeals. The 5th Circuit sent the declaratory judgment case to the Texas Supreme Court because Texas state courts have yet to address the issue. In Bennett v. Stephens Martin Paving, the underlying suit that prompted the Fairfield appeal, the widow of Roy E. Bennett, a Stephens Martin Paving employee, sued the construction company after a brooming machine rolled over and killed her husband. In the suit filed last year in Abilene’s 42nd District Court, Carrie Bennett alleges that Stephens Martin engaged in gross negligence because, among other things, it failed to ensure the mechanical soundness of the device. In its response, the company denies any wrongdoing. Under Texas’ workers compensation law, 408.001 of the Texas Labor Code, the only way a survivor of a deceased employee can obtain punitive damages from an employer is if she proves in state court that the company was grossly negligent. Carrie Bennett has received workers’ compensation benefits from Fairfield Insurance. But last year, Fairfield filed a declaratory judgment action in federal court seeking a ruling that they had neither a duty to defend nor to indemnify Stephens Martin Paving for Bennett’s punitive damage claims because it is against Texas public policy. Fairfield based its declaratory judgment on Transportation Insurance Co. v. Moriel (1994), a landmark 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. But on Aug. 25, 2003, U.S. District Judge Sam Cummings of Lubbock ruled that insuring for punitive damages is not against Texas public policy — a decision Fairfield appealed to the 5th Circuit. On Aug. 11, the 5th Circuit referred the case to the Texas Supreme Court for its consideration. PUNITIVES AS PUNISHMENT On Nov. 9, David Pruessner, the lawyer who represents Fairfield Insurance, told the court that punitive damages are just that — damages that are meant to punish. Allowing Stephens Martin to pass off punitive damages to its insurer, Fairfield Insurance, is really no punishment at all, said Pruessner, of Dallas’ Law Office of David Pruessner. Allowing the insurance company to pay for those damages causes problems, he said. For example, asking a jury to assess a defendant’s net worth to arrive at punitive damages, when a $3 million insurance policy actually picks up the cost of punitives, “is a delusional exercise,” Pruessner argued. But Charles C. Self III, a partner in Abilene’s Whitten & Young who represents Stephens Martin Paving, argued that if a company buys an insurance policy that covers punitive damages, it should get what it pays for. “It’s a pretty straightforward issue,” Self told the high court. “By allowing a policy to insure for punitive damages, is my client going to be punished?” The answer to that question is “yes,” Self told the court. The punitive damages case will undoubtedly cause Stephens Martin’s insurance premiums to rise — if it can even get insurance again. The company has to have insurance to bid on contracts, Self argued. “So we’re going to be punished,” Self told the court. Justice Harriet O’Neill wondered what would happen to companies that have paid for insurance policies that cover punitive damages and all of a sudden they are denied that coverage by a policy change at the behest of the Supreme Court. “If that is in fact covered, what does that mean if premiums have been paid?” O’Neill asked Pruessner. “All I can say is … since Moriel, that says punitive damages are not insurable,” Pruessner replied. “And insurance companies have lowered rates since that case?” O’Neill asked. “I can’t say that,” Pruessner replied. Chief Justice Wallace Jefferson asked if the practical questions presented in Fairfield would be better addressed by the legislative branch. “Doesn’t this sound like something the Legislature should be deciding in a committee hearing?” Jefferson asked Self. “I would agree with you,” Self replied. Justice Priscilla Owen seemed concerned that a punitive damage insurance policy might provide too much protection for some defendants. “If somebody who stabs someone or rapes them, can they say, ‘It’s all right. I’ve got insurance?’” Owen asked. “But most of these policies don’t cover intentional acts,” O’Neill replied. Justice Scott Brister made the point that insurance companies cover punitive damages all the time — especially in settlements. “In a settlement for $2 million, you don’t separate” punitive and actual damages, Brister told Pruessner. “So today, some insurance companies are paying for punitive damages.” “That’s correct,” Pruessner replied. AFTER ARGUMENT After the argument, attorneys on both sides of the Fairfield case were curious why justices didn’t seem all that interested in a particular issue — the duty to defend. Pruessner says he’s surprised there weren’t more questions on that issue. It’s one of the biggest concerns policyholders have. If a plaintiff makes a punitive damage claim against a policyholder, and the high court decides that insuring against punitive damages is not permitted, policyholders worry that insurance companies may not be required to provide them with a lawyer to defend the case. In the first question asked during argument, Justice Nathan Hecht asked if the duty to defend was an issue the court should look at. Pruessner told Hecht the court should look at the issue. But in reality, he told the court, most insurance companies have a duty to defend “99 percent” of tort cases because plaintiffs usually make a claim aside from punitive damages that invokes an insurance company’s responsibility to provide a defense. The Bennett litigation in Abilene, which has yet to be resolved, is the rare case in which punitive damages are the only issue in the suit, Pruessner says. Self is impressed that the justices looked at punitive damages in a real-world context. Brister’s questions, for example, showed that the justice understood that insurance companies actually pay off punitive damage claims all of the time, Self says. “These guys — they were very practical,” Self says of the justices. “And that’s good for us.” At least six amicus briefs were filed in the case — many from insurance companies supporting Fairfield’s argument that punitive damages should not be insurable and from policyholders who believe that they should. “If you paid the premium for it, then the insurance company should pay,” says Shruti Engstrom, a partner in Philadelphia’s Anderson, Kill & Olick who represents United Policy Holders, which filed an amicus brief in the case. “A lot of states across the country have looked at this and there are a lot of states that have said it’s not against public policy,” Engstrom says. But Robert D. Allen, a partner in the Dallas office of Baker & McKenzie who represents Admiral Insurance Co., which also filed an amicus brief, says contractual obligations should not prevent the court from finding that insuring for punitive damages is against public policy. “There are many, many contracts and contractual provisions that are not recognized by law because of public policy issues,” Allen says. “And in fact, eight of the 10 most populated states in the country all recognize public policy provisions against insuring against punitive damages.” Allen believes it’s time for Texas to do the same. “The insurability of punitive damages has been decided by many states’ highest courts,” Allen says. “But, until now, it has not been evaluated by the Texas Supreme Court. Texas is pretty late in the game in terms of having this issue the focus of a Supreme Court case.”

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