Until 2008, Texas law excluded punitive damages from insurance coverage as a matter of public policy. Northwestern National Cas. Co. v. McNulty, 307 F.2d 432 (5th Cir. 1962). In 2008, the Texas Supreme Court enunciated a two-step process requiring a review of the plain language of the policy and a public policy analysis to determine if the policy provided coverage. Fairfield Insurance Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 655 (Tex. 2008).

Since 2008, the legal community has subscribed to the logic that absent policy language excluding punitive damages, punitive damages are covered under the liability coverage of a personal and/or commercial auto policy. However, two recent decisions out of San Antonio moved punitive damages back into the spotlight.

In Farmers Texas County Mut. Ins. Co. v. Zuniga, No. 04–16–00773–CV, 2017 WL 54718887 (Tex. App—San Antonio Nov. 15, 2017 (slip op.), the San Antonio Court of Appeals held that a personal auto policy that covers “damages for bodily injury” does not, on its face, cover punitive damages. The court drew a distinction between an insuring agreement covering “all sums which the insured shall become legally obligated to pay as damages because o f… bodily injury,” to the narrower Farmers policy, which only covered “damages for bodily injury.” The court concluded that while the “all sums” insuring agreement may be broad enough on its face to include punitive damages, the phrase “damages for bodily injury,” standing alone, does not include punitive damages, and nothing else in the Farmers policy created coverage for punitive damages.

A few months later, U.S. District Judge Xavier Rodriguez in the Western District of Texas held the plain language of a commercial insurance policy did not cover a punitive damages award. Frederking v. Cincinnati Ins. Co., No. SA–17–CV–651–XR, 2018 WL 1514095 (W.D. Tex. Mar. 27, 2018), reconsideration denied sub nom. Frederking v. Cincinnati Ins. Co., Inc., No. SA–17–CV–651–XR, 2018 WL 2471455 (W.D. Tex. May 31, 2018). Richard Frederking alleged he was injured when his vehicle was struck by an intoxicated driver, Carlos Xavier Sanchez, who was operating a motor vehicle owned by his employer at the time of the collision. Id. at *1–2. A state court jury found Sanchez grossly negligent and awarded Frederking $207,550.00 in punitive damages. Id. Frederking filed suit against the employer's insurer, Cincinnati Insurance Company, for failing to pay the punitive damages award. Id.

The Court held under the plain language of the policy, Cincinnati was only required to indemnify an insured for an “accident” or “occurrence.” Id. at *5–6. Since the jury found Sanchez had actual, subjective awareness of the risk involved, the Court determined the collision was not an accident and the punitive damages were not covered. Id. at *8.

Zuniga and Frederking have opened the door for personal and commercial insurers to challenge punitive damage awards. The decisions may result in changes to damage evaluations completed by insurance companies in claims where gross negligence could be alleged. Insurance companies will be faced with evaluating facts that could include gross negligence or guessing whether plaintiff will pursue a gross negligence claim considering the coverage issues that may result. Either way, insurance companies are left with the impossible task of evaluating a claim when coverage on a portion of the claim could be nullified pending a certain jury finding.

The decisions should also lead to strategic considerations by the plaintiff and defense counsel. Plaintiff's counsel can no longer assume punitive damages will be covered by an insurance policy and will need to be prepared for a battle over coverage even after obtaining a punitive damages award. However, certain strategies could minimize the impact of these decisions. For instance, instead of pursuing punitive damages, plaintiff's counsel could use the potential punitive facts to build up the portions of their damages model that are clearly covered by insurance policies, such as past and future medical expenses or pain and suffering. Defense counsel would then be placed in the difficult position of minimizing the punitive conduct and risking a larger damage award in other categories covered by the policy (which may exceed policy limits) or exposing its client to potential personal liability through a gross negligence finding and punitive damages award.

Moreover, the implications of the decisions to defendants themselves could be devastating. If a jury finds a defendant was grossly negligent and awards a plaintiff punitive damages, the defendant's insurance company may decline to pay the punitive damages. A plaintiff is then left with the option of suing the insurance company (like in Frederking) or seeking the punitive damages from the Defendants themselves.

Will we see first party cases where a defendant sues his insurer for failing to pay a punitive damage award? Will defendants sue their insurer for failing to include punitive damages in their evaluations in response to Stowers demands? Will insurance companies seek to change the language of the policy to exclude punitive damages? Only time will tell. Since the Zuniga and Frederking decisions were rendered, no decisions have been issued supporting the reasoning of either Court or distinguishing them. However, since Democrats won every single seat up for grabs on four of its most influential intermediate appellate courts in the 2018 mid-term elections, whether the reasoning in Zuniga and Frederking will be adopted in other parts of the state or simply ignored remains more uncertain than ever.

Stacy Thompson is an attorney with Dallas-based Perry Law P.C., where she represents clients in insurance defense litigation, including premises liability, commercial liability defense and arbitration.