Insuring for Punitive Damages Doesn't Violate Public Policy

In an opinion that could be one of Texas' most important insurance coverage rulings in years and spark even more debate about damage awards, the 2nd Court of Appeals ruled that insuring for punitive damages does not violate public policy.

The Fort Worth court's 2-1 opinion in Westchester Fire Insurance Co. v. Admiral Insurance Co. involves a complicated dispute between two insurance companies over which one should cover the excess costs of a settlement in a nursing home neglect case, Cagle, et al. v. PeopleCare. In Cagle, the nursing home agreed to settle the case, paying about $2 million in actual and $2 million in punitive damages.

Westchester, an excess insurer for PeopleCare, appealed to the 2nd Court of Appeals challenging the trial court's partial summary judgment ruling that limits the amount of money Westchester can recover from Admiral, the nursing home's primary insurer. The court agreed with Westchester, reversing the trial court's decision.

Several appellate lawyers believe the June 26 opinion, which Admiral plans to appeal, will cause the Texas Supreme Court to consider seriously whether punitive damages should be borne strictly by the insured, and not by the insurance company, which would be the case if punitives are deemed insurable.

At issue was whether Admiral failed to settle the plaintiffs' negligence suit against the nursing home within the nursing home's policy limits, and, if it did, whether Westchester is liable for paying for part of the settlement because Admiral's policy covered punitive damages.

Cagle settled in 1995 for $4 million, says Dusty Fillmore, of Fort Worth's Fillmore Law Firm, who represented the plaintiffs in Cagle. In that nursing home neglect case, Beulah Cagle and her daughter, Lola, sued nursing home owner PeopleCare over Beulah Cagle's alleged poor treatment, which resulted in severe bedsores, Fillmore says. The trial judge had ruled that the defendant was liable for $2 million of actual damages, but before there was a hearing on punitive damages, the case settled for a total of $4 million, Fillmore says. Everything above $2 million in actual damages was considered to be punitives, he says.

In a partial summary judgment ruling in Westchester, 48th District Court Judge Bob McCoy of Fort Worth found that Admiral's insurance coverage for punitive damages 'violates the public policy of the State of Texas.' McCoy held that Westchester's recovery of damages from Admiral was limited to the amount of the Cagles' compensatory damages that exceeded Admiral's settlement contribution.

Westchester Fire appealed. However, the 2nd Court of Appeals cited state appellate opinions discussing whether insuring punitive damages is a violation of public policy, but cited nothing from either the Texas Legislature or the Texas Supreme Court on the matter.

'In the absence of any clear indication from either the Legislature or the Supreme Court on this issue, we decline to hold that insurance coverage for punitive damages under Admiral's policy violates the public policy for the State of Texas,' wrote Justice Terrie Livingston, in an opinion joined by Justice Sue Walker.

'Accordingly, we hold that on the specific facts of this case, insurance coverage for punitive damages under Admiral's policy was not void as against public policy,' Livingston wrote in a decision that remanded the case to the trial court for a new trial.

But Chief Justice John Cayce wrote a one-paragraph dissent saying that the majority had reached the wrong conclusion. 'For all of the reasons identified by the majority of this panel, other courts, and respected legal scholars, I would hold that insurance coverage for punitive damages under Admiral's policy violates public policy,' Cayce wrote.

Moving on Up

Robert D. Allen, a partner in the Dallas office of Baker & McKenzie who represents Admiral, says his client will appeal the decision to the Texas Supreme Court.

Allen says the 2nd Court of Appeals erred in its analysis of the Stowers Doctrine, a rule that puts a duty on insurance companies to settle cases if a plaintiff offers to settle his or her claim against the insured and that offer is within policy limits. That didn't happen in Cagle, Allen alleges. Allen maintains that Admiral's nursing home policy was 'silent' on the issue of covering punitive damages, but the company believes that it should be against the public policy of Texas to cover such damages. 'If you look at the way the opinion was written, it basically begs the Supreme Court to take it [the case and issue] up,' Allen said.

David Keltner, an appellate lawyer and partner in Fort Worth's Jose, Henry, Brantley & Keltner, said insuring for punitive damages is not against public policy in most states.

'The jurisdictions who have made the decision that it is against the public policy to insure punitive damages are based solely on the idea' that punitives are meant to be punishment borne by the actor and not the insurance company, Keltner said.

R. Brent Cooper, a partner in Dallas' Cooper & Scully, said Texas law on punitive damages is changing, especially after the recent passage of H.B. 4, which put heavy restrictions on punitive damage awards. Cooper, who represents insurance companies in coverage cases, says Texas law on punitive damages is becoming more akin to criminal law. And insuring against criminal activity is against public policy, Cooper said. 'From a public policy standpoint, we're moving closer and closer to [punitive damages] being criminal punishment,' Cooper said.

This article originally appeared in the Texas Lawyer, an American Lawyer Media publication.

In an opinion that could be one of Texas' most important insurance coverage rulings in years and spark even more debate about damage awards, the 2nd Court of Appeals ruled that insuring for punitive damages does not violate public policy.

The Fort Worth court's 2-1 opinion in Westchester Fire Insurance Co. v. Admiral Insurance Co. involves a complicated dispute between two insurance companies over which one should cover the excess costs of a settlement in a nursing home neglect case, Cagle, et al. v. PeopleCare. In Cagle, the nursing home agreed to settle the case, paying about $2 million in actual and $2 million in punitive damages.

Westchester, an excess insurer for PeopleCare, appealed to the 2nd Court of Appeals challenging the trial court's partial summary judgment ruling that limits the amount of money Westchester can recover from Admiral, the nursing home's primary insurer. The court agreed with Westchester, reversing the trial court's decision.

Several appellate lawyers believe the June 26 opinion, which Admiral plans to appeal, will cause the Texas Supreme Court to consider seriously whether punitive damages should be borne strictly by the insured, and not by the insurance company, which would be the case if punitives are deemed insurable.

At issue was whether Admiral failed to settle the plaintiffs' negligence suit against the nursing home within the nursing home's policy limits, and, if it did, whether Westchester is liable for paying for part of the settlement because Admiral's policy covered punitive damages.

Cagle settled in 1995 for $4 million, says Dusty Fillmore, of Fort Worth's Fillmore Law Firm, who represented the plaintiffs in Cagle. In that nursing home neglect case, Beulah Cagle and her daughter, Lola, sued nursing home owner PeopleCare over Beulah Cagle's alleged poor treatment, which resulted in severe bedsores, Fillmore says. The trial judge had ruled that the defendant was liable for $2 million of actual damages, but before there was a hearing on punitive damages, the case settled for a total of $4 million, Fillmore says. Everything above $2 million in actual damages was considered to be punitives, he says.

In a partial summary judgment ruling in Westchester, 48th District Court Judge Bob McCoy of Fort Worth found that Admiral's insurance coverage for punitive damages 'violates the public policy of the State of Texas.' McCoy held that Westchester's recovery of damages from Admiral was limited to the amount of the Cagles' compensatory damages that exceeded Admiral's settlement contribution.

Westchester Fire appealed. However, the 2nd Court of Appeals cited state appellate opinions discussing whether insuring punitive damages is a violation of public policy, but cited nothing from either the Texas Legislature or the Texas Supreme Court on the matter.

'In the absence of any clear indication from either the Legislature or the Supreme Court on this issue, we decline to hold that insurance coverage for punitive damages under Admiral's policy violates the public policy for the State of Texas,' wrote Justice Terrie Livingston, in an opinion joined by Justice Sue Walker.

'Accordingly, we hold that on the specific facts of this case, insurance coverage for punitive damages under Admiral's policy was not void as against public policy,' Livingston wrote in a decision that remanded the case to the trial court for a new trial.

But Chief Justice John Cayce wrote a one-paragraph dissent saying that the majority had reached the wrong conclusion. 'For all of the reasons identified by the majority of this panel, other courts, and respected legal scholars, I would hold that insurance coverage for punitive damages under Admiral's policy violates public policy,' Cayce wrote.

Moving on Up

Robert D. Allen, a partner in the Dallas office of Baker & McKenzie who represents Admiral, says his client will appeal the decision to the Texas Supreme Court.

Allen says the 2nd Court of Appeals erred in its analysis of the Stowers Doctrine, a rule that puts a duty on insurance companies to settle cases if a plaintiff offers to settle his or her claim against the insured and that offer is within policy limits. That didn't happen in Cagle, Allen alleges. Allen maintains that Admiral's nursing home policy was 'silent' on the issue of covering punitive damages, but the company believes that it should be against the public policy of Texas to cover such damages. 'If you look at the way the opinion was written, it basically begs the Supreme Court to take it [the case and issue] up,' Allen said.

David Keltner, an appellate lawyer and partner in Fort Worth's Jose, Henry, Brantley & Keltner, said insuring for punitive damages is not against public policy in most states.

'The jurisdictions who have made the decision that it is against the public policy to insure punitive damages are based solely on the idea' that punitives are meant to be punishment borne by the actor and not the insurance company, Keltner said.

R. Brent Cooper, a partner in Dallas' Cooper & Scully, said Texas law on punitive damages is changing, especially after the recent passage of H.B. 4, which put heavy restrictions on punitive damage awards. Cooper, who represents insurance companies in coverage cases, says Texas law on punitive damages is becoming more akin to criminal law. And insuring against criminal activity is against public policy, Cooper said. 'From a public policy standpoint, we're moving closer and closer to [punitive damages] being criminal punishment,' Cooper said.

This article originally appeared in the Texas Lawyer, an American Lawyer Media publication.