Fairfield Ins. Co. v. Stephens Martin Paving, LP, No. 04-0728 (Tex. Feb. 15, 2008)(Justice
Wainwright)(insurance coverage for punitive damages based on gross negligence, cert . question from 5th Cir
Fairfield Ins. Co. v. Stephens Martin Paving, LP, No. 04-0728 (Tex. Feb. 15, 2008)(Justice Wainwright)
motion for re-argument denied   
The Court answers the question certified by the United States Court of Appeals for the Fifth Circuit.
Justice Wainwright delivered the opinion of the Court, in which Chief Justice Jefferson, Justice Hecht,
Justice O'Neill, Justice Brister, Justice Medina, Justice Green, and Justice Willett joined, and in which
Justice Johnson joined as to Parts I, II, and IV only.
Hecht delivered a concurring opinion, in which Justice Brister, Justice Medina, and Justice Willett joined
Johnson delivered a concurring opinion.

See --->
Other Recent Texas Supreme Court Opinions | Texas Opinions
Also see -->  Cases Decided by the Texas Supreme Court in 2007 with links to opinions


Argued November 9, 2004

Justice Wainwright delivered the opinion of the Court, joined by Chief Justice Jefferson, Justice Hecht, Justice
O’Neill, Justice Brister, Justice Medina, Justice Green, and Justice Willett, and by Justice Johnson as to
sections I, II, and IV only.

   Justice Hecht filed a concurring opinion, joined by Justice Brister, Justice Medina, and Justice Willett.

   Justice Johnson filed a concurring opinion.

This case is before the Court on a certified question from the United States Court of Appeals for the Fifth
Circuit: “Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive
damages imposed on its insured because of gross negligence?” Fairfield Ins. Co. v. Stephens Martin Paving,
LP, 381 F.3d 435, 437 (5th Cir. 2004). Pursuant to article V, section 3-c of the Texas Constitution and rule
58.1 of the Texas Rules of Appellate Procedure, we answer that Texas public policy does not prohibit
coverage under the type of workers’ compensation and employer’s liability insurance policy at issue in this


   Stephens Martin Paving, a highway paving company, employed Roy Edward Bennett as a brooming
machine operator. On December 20, 2002, Bennett died as a result of injuries that occurred when a brooming
machine rolled over. Stephens Martin Paving carried a workers’ compensation and employer’s liability
insurance policy, issued by Fairfield Insurance Company. Fairfield paid workers’ compensation benefits to
Bennett’s wife and children under the policy in accordance with Texas workers’ compensation law.

   On January 24, 2003, Bennett’s survivors sued Stephens Martin Paving for gross negligence, seeking
exemplary damages because Stephens Martin Paving allegedly failed to provide a safe place to work, failed to
follow and enforce OSHA safety rules and regulations, and failed to properly train and supervise its
employees. Having received workers’ compensation benefits, Bennett’s survivors are barred by statute from
recovering actual damages and seek only exemplary damages in the suit.[1]

   On February 24, 2003, Fairfield sued Stephens Martin Paving and Bennett’s survivors in federal district
court, seeking a declaratory judgment that Fairfield owed no duty to defend or indemnify Stephens Martin
Paving in the suit for exemplary damages. Relying on Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026,
1029 (5th Cir. 1978), the federal district court concluded that the language in Fairfield’s policy covers
exemplary damages and that Texas public policy does not prohibit insurance coverage of those damages.
The court denied Fairfield’s motion for summary judgment and entered a judgment declaring that Fairfield has
a duty to defend Stephens Martin Paving and a duty to indemnify Stephens Martin Paving as provided by the
policy if Stephens Martin Paving is adjudicated responsible for the damages sought in the underlying suit
brought by Bennett’s survivors (either by judgment or settlement). Fairfield appealed, and the Fifth Circuit
certified to this Court the question of the insurability of exemplary damages for gross negligence. Fairfield Ins.
Co., 381 F.3d at 437; Tex. R. App. P. 58.1.


   Determining whether exemplary damages for gross negligence are insurable requires a two-step analysis.
See, e.g., Grinnell Mut. Reinsurance Co. v. Jungling, 654 N.W.2d 530, 535–37 (Iowa 2002); Fluke Corp. v.
Hartford Accident & Indem. Co., 34 P.3d 809, 814 (Wash. 2001); Brown v. Maxey, 369 N.W.2d 677, 685 (Wis.
1985). First, we decide whether the plain language of the policy covers the exemplary damages sought in the
underlying suit against the insured.

   Second, if we conclude that the policy provides coverage, we determine whether the public policy of Texas
allows or prohibits coverage in the circumstances of the underlying suit. We first look to express statutory
provisions regarding the insurability of exemplary damages to determine whether the Legislature has made a
policy decision. See Town of Flower Mound v. Stafford Estates Ltd. P’ship, 135 S.W.3d 620, 628 (Tex. 2004)
(“Generally, ‘the State’s public policy is reflected in its statutes.’”) (quoting Tex. Commerce Bank, N.A. v.
Grizzle, 96 S.W.3d 240, 250 (Tex. 2002)); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 873
(Tex. 2000). If the Legislature has not made an explicit policy decision, we then consider the general public
policies of Texas.


   The policy Fairfield issued to Stephens Martin Paving contains two types of insurance: workers’
compensation insurance and employer’s liability insurance. Under the workers’ compensation part of the
policy, Fairfield agrees to pay the benefits that Stephens Martin Paving is required to pay by Texas workers’
compensation law and other enumerated costs. In this case, the parties agree that the policy covers the
workers’ compensation benefits paid to the Bennetts. The workers’ compensation part of the policy makes the
employer responsible for “any payments in excess of the benefits regularly provided by the workers
compensation law including those required because: 1. of your serious and willful misconduct; . . . 3. you fail
to comply with a health or safety law or regulation.”

   Under the employer’s liability part of the policy, Fairfield agrees to pay “all sums [Stephens Martin Paving]
legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered
by this Employers Liability Insurance” and other specific costs. It excludes coverage of “punitive or exemplary
damages because of bodily injury to an employee employed in violation of law.” An endorsement to the policy
adds that “[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury.”
The policy also excludes damages arising from injuries caused by intentional acts.

   The Bennetts’ claim against Stephens Martin Paving seeks only exemplary damages for gross negligence.
Therefore, the coverage issue in this case concerns only the employer’s liability part of the policy and not the
part of the policy regarding workers’ compensation benefits. Because the Fifth Circuit’s question is directed
only at the public policy of Texas, we limit our discussion to the second prong of the analysis and presume
that the policy language covers the exemplary damages sought.


   When considering whether public policy should prohibit the coverage of exemplary damages in a particular
case, courts should study the contexts in which the Legislature has spoken. In a few instances, the Legislature
has expressly prohibited or otherwise limited the availability of such insurance.

   Health Care Providers: Article 5.15-1, section 8 of the Texas Insurance Code prohibits insurance coverage
of exemplary damages assessed against health care providers and physicians, creating an exception for a
subset of healthcare providers including hospitals, nursing homes, and assisted living facilities:

No policy of medical professional liability insurance issued to or renewed for a health care provider or
physician in this state may include coverage for exemplary damages that may be assessed against the health
care provider or physician; provided, however, that the commissioner may approve an endorsement form that
provides for coverage for exemplary damages to be used on a policy of medical professional liability
insurance issued to a hospital, as the term “hospital” is defined in this article, or to a for-profit or not-for-profit
nursing home or assisted living facility.

Tex. Ins. Code art. 5.15-1, § 8.[2]

   Guaranty Funds and Excess Liability Pools: The Legislature has explicitly excluded risk management and
excess insurance pools for various public entities[3] from paying exemplary damages.[4] In 1989, the
Legislature amended the Texas Property and Casualty Insurance Guaranty Act to exclude from the definition
of “covered claims” against insolvent insurers “any punitive, exemplary, extracontractual, or bad faith
damages awarded in a court judgment against an insured or insurer.”[5] The Legislature has included the
same prohibition for several other such entities covering exceptional risks.[6] In each instance the Legislature’
s concern appears to have been for the financial impact on these entities of insurance for exemplary damages.

   The Legislature is aware of and sensitive to issues of insurance coverage of exemplary damages. It has
made the policy decision to prohibit insurance coverage of those damages in selected circumstances.


   This Court has recognized that “the administration of the workers’ compensation system is heavily imbued
with public policy concerns.” Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553 (Tex. 2001), superseded by
statute, Tex. Lab. Code § 406.003(e), as explained in Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190,
192 (Tex. 2004). Because this case arises from a claim for exemplary damages under the Texas Workers’
Compensation Act, we review the applicable statutory scheme and accompanying insurance regulation of that

   In Texas, participation in the workers’ compensation system is optional for employers and employees.
However, if the employer purchases workers’ compensation insurance, the employer must adhere to the
statutory and regulatory guidelines of the Workers’ Compensation Act. Among these requirements is the
legislative directive that only workers’ compensation policies approved by the Texas Department of Insurance
are available in Texas.[8] Tex. Ins. Code art. 5.56.[9] These policies provide broad coverage for an employee’
s injuries. In exchange for fulfilling the Act’s requirements, the Act protects an employer from an employee’s
common law claims for injuries or death occurring during the course and scope of the employee’s work
responsibilities, except those claims involving the death of an employee caused by an employer’s intentional
or grossly negligent conduct. Tex. Lab. Code § 408.001. An employee who does not “opt out” of the workers’
compensation system waives claims not provided by the Act. Id. § 406.034. Thus, workers’ compensation
insurance provides the exclusive remedy for the injury or death of a participating employee in most cases.

   This exclusive remedy does not prohibit recovery of exemplary damages if the employee’s death is caused
by the employer’s gross negligence. Id. § 408.001(b)–(c). Section 408 states:

   (a) Recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by
workers’ compensation insurance coverage or a legal beneficiary against the employer or an agent or
employee of the employer for the death of or a work-related injury sustained by the employee.

   (b) This section does not prohibit the recovery of exemplary damages by the surviving spouse or heirs of
the body of a deceased employee whose death was caused by an intentional act or omission of the employer
or by the employer’s gross negligence.

   (c) In this section, “gross negligence” has the meaning assigned by Section 41.001, Civil Practice and
Remedies Code.

The Bennetts bring this claim for exemplary damages only under Subsections 408(b) and (c), arguing that
Stephens Martin Paving’s gross negligence caused Bennett’s death.

   TDI is authorized to adopt rules “governing hearings and other proceedings necessary for the promulgation
or approval of rates[,] . . . policy forms[,] or policy form endorsements.” Tex. Ins. Code art. 1.33C. Article 5.56
of the Insurance Code provides that TDI “shall prescribe standard policy forms to be used by all companies or
associations writing workmen’s compensation insurance in this State” and prohibits organizations from using
policy forms “other than those made, established and promulgated and prescribed by [TDI],” except as
specifically provided by the statute.[10] By Article 5.62, the Legislature “empowered [TDI] to make and enforce
all such reasonable rules and regulations not inconsistent with the provisions of this subchapter as are
necessary to carry out its provisions.” Tex. Ins. Code art. 5.62.

   Under the authority delegated to TDI from the Legislature, TDI approves standard workers’ compensation
insurance policies and endorsements. See Texas Workers’ Compensation Commission and Employers’
Liability Manual, available at http://www.tdi.state.tx.us/wc/regulation/index.html#manual. As previously
discussed, the policy provides two types of insurance coverage—workers’ compensation insurance and
employers’ liability insurance. The workers’ compensation part of the policy only provides coverage for
benefits required by workers’ compensation law and other enumerated costs, excluding punitive damages. If,
under Section 408.001, workers’ compensation insurance provides the exclusive remedy for an injured
employee who is participating in the system, then why would the TDI-approved, standard policy—the only
policy workers’ compensation insurers may use—provide any additional liability insurance to employers? The
statutory scheme and TDI’s execution of the scheme reveal an intent to provide additional insurance
coverage—coverage for an employer’s gross negligence.[11] Although Section 408.001 allows an employee
to pursue a claim for exemplary damages against an employer for intentional acts, the insurance policy here
excludes coverage for such intentional acts. Thus, the “all sums” language in the employer’s liability part of
this TDI-approved, dual coverage policy covers some of the common law claims excluded from the workers’
compensation part of the policy, but it does not cover claims based on intentional acts. Under TDI’s policy, a
participating employer would have coverage for workers’ compensation claims and claims based on gross
negligence. The Legislature’s expressed intent is that Texas public policy does not prohibit insurance
coverage for claims of gross negligence in this context.


   Although the Legislature’s expressed direction ends our inquiry in the present case, we recognize that the
Fifth Circuit framed its certified question as a broad inquiry about Texas public policy and the coverage of
exemplary damages. We hesitate to opine on policy language and fact situations not before us, but also
recognize the import of this issue and therefore discuss some of the considerations relevant to determining
whether Texas public policy prohibits insurance coverage of exemplary damages in other contexts in the
absence of a clear legislative policy decision.


   Although determining whether public policy prohibits the insurance coverage of exemplary damages for
gross negligence in Texas is a novel question for this Court, the issue is no stranger to the United States’
legal community. Christopher A. Wilson, Lazenby after Hodges—Insurability of Punitive Damage Awards in
Tennessee: A Continuing Question of Public Policy, 36 U. Mem. L. Rev. 463 (2006); Stephanie L. Grassia,
The Insurability of Punitive Damages in Washington: Should Insureds Who Engage in Intentional Misconduct
Reap the Benefit of Their “Bargains?,” 26 Seattle U. L. Rev. 627 (2003); Lorelie S. Masters, Punitive
Damages: Covered or Not?, 55 Bus. Law. 283 (1999); Michael A. Rosenhouse, Annotation, Liability Insurance
Coverage as Extending to Liability for Punitive or Exemplary Damages, 16 A.L.R.4th 11 (1982).

   For over forty years, courts, legislatures, and scholars nationwide have struggled with this issue. Of the
forty-five states in which the highest court of the state or the legislature has addressed the insurability of
exemplary damages in some fashion, twenty-five have established generally that their public policy does not
prohibit coverage, sometimes including or excluding the uninsured motorist or vicarious liability contexts.[12]
Eight states have adopted a broad prohibition against insuring exemplary damages.[13] Seven states allow
insurance coverage of exemplary damages only in the vicarious liability context, prohibiting the practice
otherwise.[14] Three states allow insurance coverage of exemplary damages in the uninsured motorist
context, but have not directly spoken outside this context.[15] Two other states have precluded insurance
coverage of exemplary damages in the uninsured motorist context, but have not otherwise directly spoken on
the issue.[16] Finally, the insurability of exemplary damages resulting from acts akin to gross negligence has
not been addressed by the highest court or legislature in Indiana, Michigan, Missouri, and Texas.[17] Thus,
the majority of states that have considered whether public policy prohibits insurance coverage of exemplary
damages for gross negligence, either by legislation or under the common law, have decided that it does not.

   Two key cases, decided over forty years ago, continue to illustrate the opposing viewpoints on the
insurability of exemplary damages: Northwestern National Insurance Co. v. McNulty, 307 F.2d 432 (5th Cir.
1962), and Lazenby v. Universal Underwriters Insurance Co., 383 S.W.2d 1 (Tenn. 1964). In McNulty, a drunk
driver seriously injured another motorist in Florida. 307 F.2d at 433. The injured motorist sued for
compensatory and punitive damages, securing a verdict for $57,500: $37,500 in compensatory damages and
$20,000 in punitive damages. Id. The drunk driver’s insurance policy provided $50,000 in coverage. Id. The
insurer argued that only the compensatory part of the verdict was covered by the policy. Id. The court agreed,
holding that Florida public policy prohibited the insurability of punitive damages. Id. at 434.

   Key to the court’s reasoning was its conclusion that Florida law characterized “punitive damages as a
penalty, imposed as a means of punishing the defendant in order to deter him and others from antisocial
conduct, and to no significant extent compensation.” Id. at 436. The court relied heavily on the different
functions of punitive and compensatory damages in different states’ schemes:

The crucial distinction . . . is the different function served by compensatory and punitive damages. In a system
of law basing recovery of damages on the defendant’s culpability, compensatory liability, while it may
discourage negligent conduct as a side effect, is primarily designed to shift a loss from a wholly innocent party
to one whose fault is responsible for causing the loss, although in many cases the fault of the responsible
party may not have been so blameworthy that he would have been punished criminally if the fault had not
caused an accident. The rationale of compensatory damages is not so much a policy that the responsible
party should pay; it is more a policy that the wholly innocent party should not pay. Insurance against
compensatory liability therefore does not frustrate the reason for imposing the liability. But in a case involving
the determination that punitive damages are insurable the public policy considerations are broader and more

Id. at 438. The court concluded that allowing a wrongdoer “to insure himself against punishment” would result
in “a freedom of misconduct inconsistent with the establishment of sanctions against such conduct.” Id. at 440.
However, even the McNulty court recognized some exceptions to this rule, suggesting that public policy would
not prohibit an employer from obtaining insurance to cover exemplary damage awards arising from the acts of
employees. Id.

   The Supreme Court of Tennessee decided the lead case in support of the insurability of exemplary
damages only a few years after the McNulty decision. Lazenby, 383 S.W.2d 1. Again, the case involved an
insurance company’s refusal to pay the punitive damages portion of a verdict against a drunk driver. Id. at 2.
The court recognized that the dominant purpose of exemplary damages in Tennessee was similar to that
discussed in McNulty: “the interest of society and of the agreed [sic] individual are blended and such damages
are allowed as punishment for such conduct and as an example or warning to the one so guilty, and others, in
order to deter them from committing like offenses in the future.” Id. at 4. Despite the similarity of the two
courts’ characterizations of the purpose of exemplary damages, the Tennessee Supreme Court held that the
exemplary damages in that case were insurable. Id. at 5.

   First, the Lazenby court explained that if criminal sanctions “apparently have not deterred this slaughter on
our highways and streets,” then “the closing of the insurance market, in the payment of punitive damages”
would be unlikely to deter such wrongful conduct. Id. Second, the expectations of the insured, upon reading
the plain language of the insurance policy, was that exemplary damages would be covered absent intentional
conduct to injure. Id. The court also concluded that the line between “simple negligence and negligence upon
which an award of punitive damages can be made” did not justify a public policy exception for acts otherwise
covered by the insurance policy. Id. Finally, the court observed that using public policy arguments to partially
void a contract that, if construed as written, would protect the insured from both compensatory and punitive
damages should not be done “except in a clear case” and concluded that “the reasons advanced do not make
such a clear case.” Id.

   These cases outline the primary arguments advanced by the parties in this case and the arguments
considered by courts nationwide. We now consider these arguments in light of Texas law.


   In the absence of expressed direction from the Legislature, whether a promise or agreement will be
unenforceable on public policy grounds will be determined by weighing the interest in enforcing agreements
versus the public policy interest against such enforcement. See Restatement (Second) of Contracts § 178(1)
(“A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides
that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public
policy against the enforcement of such terms.”). On one side of the scale is Texas’ general policy favoring
freedom of contract. Lawrence, 44 S.W.3d at 553. Courts weighing this interest should consider the
reasonable expectations of the parties and the value of certainty in enforcement of contracts generally. See
Restatement (Second) of Contracts § 178(2).[18] On the other side of the scale is the extent to which the
agreement frustrates important public policy.[19] Id. § 178 cmts. (b)–(d).


   We find applicable here our observations in Lawrence, in which this Court affirmed the enforceability of an
agreement related to the Workers’ Compensation Act and considered public policies relevant at that time:

   Undoubtedly, the issue we face raises critical and complex public policy issues. And the administration of
the workers’ compensation system is heavily imbued with public policy concerns. At the same time, we have
long recognized a strong public policy in favor of preserving the freedom of contract. Courts must exercise
judicial restraint in deciding whether to hold arm’s-length contracts void on public policy grounds:

. . . .

   Given the lack of any clear legislative intent to prohibit agreements like the ones before us, and absent any
claim by the petitioners of fraud, duress, accident, mistake, or failure or inadequacy of consideration, we
decline to declare them void on public policy grounds. We believe the factually-intensive, competing public
policy concerns raised by the parties and by amici in these cases are not clearly resolved by the statute and
are best resolved by the Legislature, not the judiciary.

Lawrence, 44 S.W.3d at 553. This Court has long recognized Texas’ strong public policy in favor of preserving
the freedom of contract. Tex. Const. art. I, § 16 (“No bill of attainder, ex post facto law, retroactive law, or any
law impairing the obligation of contracts, shall be made.”); see also Churchill Forge, Inc. v. Brown, 61 S.W.3d
368, 371 (Tex. 2001); Lawrence, 44 S.W.3d at 553 (citations omitted); Wood Motor Co. v. Nebel, 238 S.W.2d
181, 185 (Tex. 1951).

[I]f there is one thing which more than another public policy requires it is that men of full age and competent
understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely
and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this
paramount public policy to consider–that you are not lightly to interfere with this freedom of contract.

Nebel, 238 S.W.2d at 185 (quoting Printing & Numerical Registering Co. v. Sampson, 19 L.R.Eq. 462, 465
(1875)). We also recognize the importance of the “indispensable partner” to the freedom of contract: contract
enforcement. Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 94 S.W.3d 163, 176 (Tex. App.—
Houston [14th Dist.] 2002, no pet.) (en banc). Importantly, freedom of contract is not unbounded. “As a rule,
parties have the right to contract as they see fit as long as their agreement does not violate the law or public
policy.” In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129 & n.11 (Tex. 2004); see Sonny Arnold, Inc. v.
Sentry Sav. Ass’n, 633 S.W.2d 811, 815 (Tex. 1982) (recognizing “the parties’ right to contract with regard to
their property as they see fit, so long as the contract does not offend public policy and is not illegal”). Absent
strong public policy reasons for holding otherwise, however, the preservation of contractual freedom and
enforcement is no less applicable to the relationship between an insured and insurer. See Fortis Benefits v.
Cantu, 234 S.W.3d 642, 648, 649 (Tex. 2007).

   The Legislature determines public policy through the statutes it passes. Stafford Estates Ltd. P’ship, 135 S.
W.3d at 628; Grizzle, 96 S.W.3d at 250 (Texas’ public policy is reflected in its statutes); FM Props. Operating
Co., 22 S.W.3d at 873. The Legislature has passed many laws declaring certain agreements illegal and,
therefore, against public policy. See, e.g., Tex. Bus. & Com. Code § 2.302 (unconscionable contracts); Id. §
15.05 (contracts in restraint of trade or commerce); Tex. Fin. Code § 302.001 (contracts for usurious
interest); Tex. Civ. Prac. & Rem. Code §§ 127.002–.003 (certain mineral agreements that provide for
indemnification of a negligent indemnitee).

   In other cases, the Legislature has decided that public policy requires certain conditions be met before an
agreement may be enforceable. See, e.g., Tex. Bus. & Com. Code § 17.42 (A consumer’s waiver of DTPA
remedies is against public policy unless specific requirements are met.); Tex. Gov’t Code § 2254.005
(Contracts for professional services not obtained in compliance with the Professional Services Procurement
Act are void as against public policy.); Tex. Lab. Code § 406.035 (Except as provided by statute, an
agreement waiving an employee’s right to workers’ compensation is void.).

   Also, this Court has held in a number of cases over the years that public policy clearly disfavors certain
types of agreements.[20] In these circumstances, the Court has exercised its authority to determine and
enforce public policy.


   In situations where the Legislature has not spoken directly on whether public policy prohibits insurance
coverage of exemplary damages for gross negligence, a court should consider the purpose of exemplary
damages. The common law and legislative development of exemplary damages in Texas informs this analysis.

   For over 150 years, this Court has held that exemplary damage awards serve to punish the wrongdoer and
set “a public example to prevent the repetition of the act.” Cole v. Tucker, 6 Tex. 266, 268 (1851); Graham v.
Roder, 5 Tex. 141, 149 (1849); see also Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 555 (Tex.
1985). We confirmed that dual purpose in Transportation Insurance Co. v. Moriel, citing the Legislature’s
definition of exemplary damages in force at the time of the opinion: “‘Exemplary damages’” means “any
damages awarded as an example to others, as a penalty, or by way of punishment.” 879 S.W.2d 10, 16 (Tex.
1994). Although some pre-Moriel decisions recognized that exemplary damages “also exist to reimburse for
losses too remote to be considered as elements of strict compensation” or to compensate a plaintiff for
inconvenience and attorneys fees, these cases do not undermine the longstanding primary purpose of
exemplary damages: to punish and deter. See Hofer v. Lavender, 679 S.W.3d 470, 474 (Tex. 1984) (citing
Mayer v. Duke, 10 S.W. 565 (1889)); Allison v. Simmons, 306 S.W.2d 206, 211 (Tex. Civ. App.—Waco 1957,
writ ref’d n.r.e.); Foster v. Bourgeois, 253 S.W. 880 (Tex. Civ. App.—Austin 1923), aff’d, 259 S.W. 917 (Tex.

   Legislative enactments of the last decade clarify compensatory recovery is not a component of exemplary
damages in Texas today, and the most recent enactments downplay the role of deterrence and focus
squarely on the punitive aspect. Act of April 11, 1995, 74th Leg., R.S., ch. 19, § 1, 1995 Tex. Gen. Laws 108,
109 (deleting “as an example to others” from the definition and instead defining exemplary damages as “any
damages awarded as a penalty or by way of punishment”), amended by Act of June 2, 2003, 78th Leg., ch.
204, § 13.02, 2003 Tex. Gen. Laws 847, 887 (current version at Tex. Civ. Prac. & Rem. Code § 41.001(5))
(“‘Exemplary damages’ means any damages awarded as a penalty or by way of punishment but not for
compensatory purposes. Exemplary damages are neither economic nor noneconomic damages.”).[21]

   Chapter 41 of the Texas Civil Practice and Remedies Code also makes clear that the punishment imposed
through exemplary damages is to be directed at the wrongdoer. Section 41.006 provides that “[i]n any action
in which there are two or more defendants, an award of exemplary damages must be specific as to a
defendant, and each defendant is liable only for the amount of the award made against that defendant.” A
defendant’s liability for exemplary damages based on the conduct of employees, agents, and associates is
also limited. Section 41.005 provides that “a court may not award exemplary damages against a defendant
because of the criminal act of another” unless:

   (1) the criminal act was committed by an employee of the defendant;

   (2) the defendant is criminally responsible as a party to the criminal act under the provisions of Chapter 7,
Penal Code;

   (3) the criminal act occurred at a location where, at the time of the criminal act, the defendant was
maintaining a common nuisance under the provisions of Chapter 125, Civil Practice and Remedies Code, and
had not made reasonable attempts to abate the nuisance; or

   (4) the criminal act resulted from the defendant’s intentional or knowing violation of a statutory duty under
Subchapter D, Chapter 92, Property Code, and the criminal act occurred after the statutory deadline for
compliance with that duty.

Tex. Civ. Prac. & Rem. Code § 41.005(a)–(b). Even when the actor is the defendant’s employee, the
defendant is not liable for exemplary damages unless:

   (1) the principal authorized the doing and the manner of the act;

   (2) the agent was unfit and the principal acted with malice in employing or retaining him;

   (3) the agent was employed in a managerial capacity and was acting in the scope of employment; or

   (4) the employer or a manager of the employer ratified or approved the act.

Id. § 41.005(c). Chapter 41 provides that exemplary damages can be awarded for fraud, malice, gross
negligence, or certain statutory violations. Id. § 41.003(a), (c). “Fraud” does not include constructive fraud. Id.
§ 41.001(6). “Malice” requires specific intent to cause substantial injury. Id. § 41.001(7). “Gross negligence “
is defined as:

an act or omission:

   (A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an
extreme degree of risk, considering the probability and magnitude of the potential harm to others; and

   (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with
conscious indifference to the rights, safety, or welfare of others.

Id. § 41.001(11). Other statutory actions may prescribe a different culpable mental state for exemplary
damages. Id. § 41.003(c). With these basic standards in mind, Section 41.011(a) provides:

   In determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:

   (1) the nature of the wrong;

   (2) the character of the conduct involved;

   (3) the degree of culpability of the wrongdoer;

   (4) the situation and sensibilities of the parties concerned;

   (5) the extent to which such conduct offends a public sense of justice and propriety; and

   (6) the net worth of the defendant.

Id. § 41.011(a).

   The first, second, and fifth evidentiary factors raise concerns of an objective nature. How did the conduct of
the defendant, viewed in the abstract, irrespective of the parties, depart from broad norms or expectations? It
does not matter whether the defendant was a conglomerate or an individual; the nature of the conduct is what
matters. On the other hand, the third, fourth, and sixth factors focus subjectively—because the issue is
punishment—on the individual parties. What will it take to punish the defendant?

   There is some inherent tension between the policies recognized by freedom of contract and the policy
behind awarding exemplary damages. Spreading the risk of, and obligation for, exemplary damages through
insurance does not affect the objective factors. They may be evaluated without regard for individual
personalities. The issue is this: What penalty should this conduct, in the abstract, bear? But the subjective
factors are relevant to a determination of the amount of exemplary damages only if the defendant must pay it
to the plaintiff. If exemplary damages are to be paid by insurance, it is less relevant to set the amount based
on whether the plaintiff was trusting or the defendant calculating or wealthy.

   A few cases applying Texas law have considered whether insurance for exemplary damages is against
public policy in light of the purpose behind exemplary damages. Their reasoning regarding the interplay of
these competing policies is instructive.

   Texas appellate courts have uniformly rejected as against public policy coverage under uninsured or
underinsured motorist policies when the insured seeks to recover from his own insurer exemplary damages
assessed against a third-party tortfeasor.[22] In that situation, the burden of the exemplary damages would
fall entirely on the insurer and its policyholders, not on the tortfeasor, thereby entirely defeating the purpose
of such damages. In one case, State Farm Mutual Automobile Insurance Co. v. Shaffer, Shaffer was injured in
an automobile accident with Torres. 888 S.W.2d at 147. The court of appeals held that it was against public
policy to require State Farm, Shaffer’s insurer, to pay exemplary damages assessed against Torres. Id. at
149. Citing Chapter 41 as establishing the basis and manner for assessing exemplary damages, the court
explained that “neither deterrence of wrongful conduct nor punishment of Torres, the wrongdoer, is achieved
by imposing exemplary damages upon Shaffer’s insurance carrier for Torres’ wrongful act.” Id. (citations

   Other Texas courts of appeals have noted that the policy considerations regarding exemplary damages
coverage depend on whether the basis for the damages is the conduct of the insured’s employees or agents.
In American Home Assurance Co. v. Safway Steel Products Co., the insurers appealed a declaratory judgment
in favor of the insureds for coverage of exemplary damages. 743 S.W.2d 693, 695–96 (Tex. App.—Austin
1987, writ denied). Exemplary damages of $750,000 and $1 million had been assessed against the insureds,
respectively, in one case for gross negligence in failing to warn about the limitations of a football helmet the
insured manufactured and in the other case for gross negligence in the design and marketing of a scaffold. Id.

   The court of appeals observed that while allowing exemplary damages coverage shifts the burden of the
punishment to “the innocent members of society who purchase insurance,” contrary to the purpose of such
damages, disallowing coverage for a large corporation means that exemplary damages for the misconduct of
perhaps one or only a few employees will “inevitably be passed on to the consumers of its products—who are
also innocent,” also contrary to the damages’ purpose. Id. at 704.

   In DaimlerChrysler Insurance Co. v. Apple, an employee claimed that three of his employer’s managers had
defamed him. No. 01-05-01115-CV, 2007 WL 3105899, at *1–2 (Tex. App.—Houston [1st Dist.], Oct. 25,
2007, reh’g filed). The trial court confirmed in part the arbitration panel’s assessment of exemplary damages
of $500,000 against the employer, $500,000 against its owner and CEO, and $50,000 each against the three
managers, all of whom were determined to be vice-principals. Id. at *3 & n.4.[23] Following an appeal, the
employer settled with the employee, but the employer’s insurer under both a CGL policy and an umbrella
policy refused coverage of the exemplary damage awards, arguing in part that such coverage was against
public policy. Id. at *3–4. The court of appeals disagreed but limited its holding to circumstances “where a
corporation is held liable for conduct by vice-principals; the conduct was done without the participation or
knowledge of the CEO, officers or shareholders of the corporation.” Id. at *18 (citations omitted). The court
explained that under these circumstances “the agreement . . . serves the public good because [the employer],
its CEO, its officers, and its shareholders did not commit the wrongful acts and should be allowed to have their
insurance policy, for which they paid, indemnify them for the punitive damages.” Id. (citations omitted).[24]

   These courts of appeals cases highlight the general considerations that are important when determining
whether the policy behind exemplary damages should limit parties’ ability to contract for coverage of those
damages. In the uninsured and underinsured motorist context, it may be appropriate for policyholders to
share in the burden of injuries caused by underinsured motorists, but not their punishment. In other words,
the purpose of exemplary damages may not be achieved by penalizing those who obtain the insurance
required by law for the wrongful acts of those who do not.

   The considerations may weigh differently when the insured is a corporation or business that must pay
exemplary damages for the conduct of one or more of its employees. Where other employees and
management are not involved in or aware of an employee’s wrongful act, the purpose of exemplary damages
may be achieved by permitting coverage so as not to penalize many for the wrongful act of one. When a party
seeks damages in these circumstances, courts should consider valid arguments that businesses be permitted
to insure against them.

   Extreme circumstances may prompt a different analysis. The touchstone is freedom of contract, but strong
public policies may compel a serious analysis into whether a court may legitimately bar contracts of insurance
for extreme and avoidable conduct that causes injury. For example, liability policies themselves normally bar
insurance for damages caused by intentional conduct, as did the liability policy in this case. The fact that
insurance coverage for exemplary damages may encourage reckless conduct likewise gives us pause. Were
the existence of insurance coverage to completely eviscerate the punitive purpose behind awarding
exemplary damages, it could defeat not only an explicit legislative policy but also the court’s traditional role in
deterring conscious indifference. See Restatement (Second) of Contracts § 178(3). However, Justice Hecht’s
concurrence would go further and more fully address these circumstances.


   The Legislature authorized the Texas Department of Insurance to create a policy that provides insurance
coverage for exemplary damages in workers’ compensation cases. Thus, we decline to invalidate the parties’
workers’ compensation contract to enforce a public policy urged by Fairfield but not adopted by the
Legislature. In response to the certified question, we answer that the public policy of Texas does not prohibit
insurance coverage of exemplary damages for gross negligence in the workers’ compensation context.
However, without clear legislative intent to generally prohibit or allow the insurance of exemplary damages
arising from gross negligence, we decline to make a broad proclamation of public policy here but instead offer
some considerations applicable to the analysis in other cases. Of course, how our answer is applied in the
case before the Fifth Circuit is solely the province of that certifying court. Amberboy v. Societe de Banque
Privee, 831 S.W.2d 793, 798 (Tex. 1992).


   J. Dale Wainwright


OPINION DELIVERED: February 15, 2008

[1] Generally, an employer who purchases workers’ compensation insurance is protected from an employee’s
common law claims for injuries occurring during the course and scope of the employee’s work responsibilities.
Tex. Lab. Code § 408.001. However, this exclusive remedy doctrine does not prohibit recovery of exemplary
damages if the employee’s death is caused by the employer’s gross negligence. Id. § 408.001(b)–(c).

[2] As part of the Medical Liability Insurance Improvement Act of Texas, passed in 1977, the Legislature
prohibited “health care providers” from obtaining insurance coverage of exemplary damages in Texas. Act of
May 30, 1977, 65th Leg., R.S., ch. 817, Part 3, § 8, 1977 Tex. Gen. Laws 2039, 2055–56. “Health care
provider” was defined as:

any person, partnership, professional association, corporation, facility, or institution licensed or chartered by
the State of Texas to provide health care as a registered nurse, hospital, dentist, podiatrist, chiropractor,
optometrist, blood bank that is a nonprofit corporation chartered to operate a blood bank and which is
accredited by the American Association of Blood Banks, or not-for-profit nursing home, or an officer,
employee, or agent of any of them acting in the course and scope of his employment.

Act of May 30, 1977, 65th Leg., R.S., ch. 817, Part 3, § 2(2), 1977 Tex. Gen. Laws 2039, 2055. Later
amendments redefined health care providers and expressly allowed providers to obtain insurance coverage of
exemplary damages through an approved policy endorsement. Act of June 3, 1987, 70th Leg., 1st C.S., ch. 1,
§ 7.01, 1987 Tex. Gen. Laws 1, 35–36 (allowing an endorsement for hospitals); Act of May 21, 1997, 75th
Leg., R.S., ch. 746, § 1, 1997 Tex. Gen. Laws 2451, 2451 (allowing an endorsement for not-for-profit nursing
homes); Act of May 27, 2001, 77th Leg., R.S., ch. 1284, § 5.02, 2001 Tex. Gen. Laws 3083, 3085 (requiring
an endorsement for for-profit nursing homes); Act of May 14, 2003, 78th Leg., R.S., ch. 141, § 2, 2003 Tex.
Gen. Laws 195, 195 (allowing an endorsement for assisted living facilities).

[3] Act of June 3, 1987, 70th Leg., 1st C.S., ch. 1, § 5.08, 1987 Tex. Gen. Laws 1, 26 (current version at Tex.
Ins. Code §§ 2207.001–.409) (Excess Liability Pool for Counties and Certain Educational Entities); Act of June
3, 1987, 70th Leg., 1st C.S., ch. 1, § 5.09, 1987 Tex. Gen. Laws 1, 31 (current version at Tex. Ins. Code §§
2208.001–.309) (Texas Public Entity Excess Insurance Pool).

[4] Tex. Ins. Code § 2207.353(c) (“Money in the [Excess Liability Fund for Counties and Certain Educational
Entities] may not be used to pay: (1)punitive damages . . . .”); id. § 2208.252(b) (“Money in the [Texas Public
Entity Excess Insurance Fund] may not be used to pay: (1) punitive damages . . . .”); id. § 2208.303 (“Excess
insurance coverage provided by the [Texas Public Entity Excess Insurance Pool] may not include coverage for
punitive damages.”).

[5] Act of May 29, 1989, 71st Leg., R.S., ch. 1082, § 6.13, 1989 Tex. Gen. Laws 4370, 4395–96 (current
version at Tex. Ins. Code § 462.210). See also Act of May 30, 2003, 78th Leg., R.S., ch. 1218, § 2, 2003 Tex.
Gen. Laws 3458, 3459 (current version at Tex. Ins. Code § 462.302(c)(2)) (“The [Texas Property and
Casualty Insurance Guaranty Association] has no liability for . . . claims for . . . exemplary damages . . . .”).
That Act was first passed in 1971 to protect insolvent property and casualty insurers’ policyholders and third-
party claimants by authorizing assessments against other Texas insurers to pay “covered claims” against
insurers that had become insolvent. Act of May 12, 1971, 62d Leg., R.S., ch. 360, § 1, 1971 Tex. Gen. Laws
1362 (current version at Tex. Ins. Code §§ 462.001–.351).

[6] Tex. Ins. Code § 463.204 (9) (stating that the Life, Accident, Health, and Hospital Service Insurance
Guaranty Association cannot pay punitive or exemplary damages); id. § 2203.154 (“The [Medical Liability
Insurance Joint Underwriting Association] may not issue or renew a medical liability insurance policy for a
physician or health care provider under this chapter that includes coverage for punitive damages assessed
against the physician or health care provider.”); id. § 2205.253(b) (Money in the [Texas Child-Care Facility
Liability Fund] may not be used to pay: (1) punitive damages . . . .”); id. § 2209.253(b) (“Money in the [Texas
Nonprofit Organizations Liability Fund] may not be used to pay: (1) punitive damages . . . .”); id. § 2209.303
(“Liability insurance coverage provided by the [Texas Nonprofit Organizations Liability Pool] may not include
coverage for punitive damages.”); id. § 2602.255(4) (excluding “exemplary, extracontractual, or bad faith
damages awarded against an insured or title insurance company by a court judgment” from “covered claims”
against the Texas Title Insurance Guaranty Association).

[7] The Legislature also requires commercial liability insurers to file closed claim reports including, among
much other information, “amounts paid for punitive damages.” Tex. Ins. Code § 38.154(a)(3)(C)(x). At a
minimum, this suggests that the Legislature is aware that insurers are making some payments for punitive
damages and has not broadly prohibited those payments.

[8] Before 1991, the Texas Department of Insurance (TDI) was known as the State Board of Insurance. Act of
May 27, 1991, 72d Leg., R.S., ch. 242, § 1.01, 1991 Tex. Gen. Laws 939, 939; see also Act of May 30, 1993,
73rd Leg., R.S., ch. 685, § 1.01, 1993 Tex. Gen. Laws 2559, 2559 (specifying that “a reference in [all statutes
involving insurance] to the State Board of Insurance means [TDI]”).

[9] In 2005, the Legislature renumbered and codified Article 5.56 and other articles into sections of the Texas
Insurance Code. Act of May 24, 2005, 79th Leg. R.S., ch. 727, §§ 2, 18(a)(4). We cite to the version
applicable to the underlying suit in this case. Tex. Ins. Code art. 5.56 (added by Act of June 7, 1951, 52d
Leg., R.S., ch. 491, 1951 Tex. Gen. Laws 868, 945).

[10] Organizations may “use any form of endorsement appropriate to its plan of operation, if such
endorsement [is] first submitted to and approved by the Board.” Tex. Ins. Code art. 5.57.

[11] The TDI policy does not provide coverage of “punitive or exemplary damages because of bodily injury to
an employee employed in violation of law,” nor does it cover these damages arising from injuries caused by
intentional acts. An endorsement to the policy adds that “[t]his exclusion does not apply unless the violation of
law caused or contributed to the bodily injury.” We note that Bennett’s petition alleges that Stephens Martin
Paving failed to follow and enforce safety rules and regulations and OSHA rules and regulations. Because we
do not have a complete record and we limit our discussion to the Fifth Circuit’s certified question, we do not
address whether these allegations trigger the exclusion.

[12] Haw. Rev. Stat. § 431:10-240 (2007) (“Coverage under any policy of insurance issued in this State shall
not be construed to provide coverage for punitive or exemplary damages unless specifically included.”); Mont.
Code Ann. § 33-15-317 (2007) (“Insurance coverage does not extend to punitive or exemplary damages
unless expressly included by the contract of insurance.”); Nev. Rev. Stat. § 681A.095 (2007) (“An insurer may
insure against legal liability for exemplary damages or punitive damages that do not arise from a wrongful act
of the insured committed with the intent to cause injury to another.”); Va. Code Ann. § 38.2-227 (2007) (“It is
not against the public policy of the Commonwealth for any person to purchase insurance providing coverage
for punitive damages arising out of the death or injury of any person as the result of negligence, including
willful and wanton negligence, but excluding intentional acts.”); Montgomery Health Care Facility, Inc. v.
Ballard, 565 So.2d 221, 226 (Ala. 1990) (wrongful death case); State Farm Mut. Auto. Ins. Co. v. Lawrence,
26 P.3d 1074, 1080 (Alaska 2001); State Farm Mut. Auto. Ins. Co. v. Wilson, 782 P.2d 727, 729–36 (Ariz.
1989); Cal. Union Ins. Co. v. Ark. La. Gas Co., 572 S.W.2d 393, 453 (Ark. 1978) (citing So. Farm Bureau Cas.
Ins. Co. v. Daniel, 440 S.W.2d 582 (Ark. 1969)); Jones v. State Farm Mut. Auto. Ins. Co., 610 A.2d 1352, 1354
(Del. 1992); Roman v. Terrell, 393 S.E.2d 83, 86 (Ga. Ct. App. 1990), aff’d by, State Farm Mut. Auto Ins. Co.
v. Weathers, 392 S.E.2d 1 (Ga. 1990); Abbie Uriguen Oldsmobile Buick, Inc. v. U.S. Fire Ins. Co., 511 P.2d
783, 789–91 (Idaho 1973); Grinnell, 654 N.W.2d at 540–41 (citing Skyline Harvestore Sys., Inc. v. Centennial
Ins. Co., 331 N.W.2d 106, 109 (Iowa 1983)); Ky. Cent. Ins. Co. v. Schneider, 15 S.W.3d 373, 376 (Ky. 2000)
(citing Cont’l Ins. Cos. v. Hancock, 507 S.W.2d 146 (Ky. 1973)); First Nat’l Bank of St. Mary’s v. Fid. & Deposit
Co., 389 A.2d 359, 364–67 (Md. 1978); Shelter Mut. Ins. Co. v. Dale, 914 So. 2d 698, 703 (Miss. 2005);
Mazza v. Med. Mut. Ins. Co. of N.C., 319 S.E.2d 217, 220–22 (N.C. 1984) (negligent medical malpractice);
MacKinnon v. Hanover Ins. Co., 471 A.2d 1166, 1168 (N.H. 1984) (holding that public policy does not prohibit
homeowner’s insurance policy from covering liability arising from intentional tort of battery and negligent
infliction of emotional distress); Cont’l Cas. Co. v. Kinsey, 499 N.W.2d 574, 581 (N.D. 1993) (requiring insurer
to indemnify insured for punitive damages award according to insurance policy, but allowing insurer to seek
reimbursement from insured because contracting away responsibility for “willful fraud and deceit” violated
state statute); Harrell v. Travelers Indem. Co., 567 P.2d 1013, 1021 (Or. 1977); S.C. State Budget & Control
Bd. v. Prince, 403 S.E.2d 643, 648 (S.C. 1991) (holding insurer could not deny coverage for punitive
damages “in the name of the public policy when the language of its own policy specifically provides such
coverage,” but failing to explain why); State v. Glens Falls Ins. Co., 404 A.2d 101, 105 (Vt. 1979); Fluke, 34 P.
3d at 815; Loveridge v. Chartier, 468 N.W.2d 146, 159 (Wis. 1991); State ex rel. State Auto Ins. Co. v.
Risovich, 511 S.E.2d 498, 505 (W. Va. 1998); Sinclair Oil Corp. v. Columbia Cas. Co., 682 P.2d 975, 981
(Wyo. 1984).

[13] Ohio Rev. Code Ann. § 3937.182(B) (2008) (prohibiting coverage for punitive and exemplary damages in
automobile policies and certain types of casualty and liability policies); Utah Code Ann. § 31A-20-101(4)
(2007) (“No insurer may insure or attempt to insure against . . . punitive damages.”); PPG Indus. v.
Transamerica Ins. Co., 975 P.2d 652, 657 (Cal. 1999); Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo.
1996); Bernier v. Burris, 497 N.E.2d 763, 776 (Ill. 1986) (citing Beaver v. Country Mut. Ins. Co., 420 N.E.2d
1058, 1060–61 (Ill. App. Ct. 1981)) (in dicta); Biondi v. Beekman Hill House Apartment Corp., 731 N.E.2d 577,
579 (N.Y. 2000); Town of Cumberland v. R.I. Interlocal Risk Mgmt. Trust, Inc., 860 A.2d 1210, 1219 n.14 (R.I.
2004); City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845, 848 (S.D. 1990).

[14] Kan. Stat. Ann. § 40-2,115(a) (2006) (“It is not against the public policy of this state for a person or entity
to obtain insurance covering liability for punitive or exemplary damages assessed against such insured as the
result of acts or omissions, intentional or otherwise, of such insured’s employees, agents or servants, or of
any other person or entity for whose acts such insured shall be vicariously liable, without the actual prior
knowledge of such insured.”); Bodner v. United Servs. Auto. Ass’n, 610 A.2d 1212, 1221–22 (Conn. 1992); U.
S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061, 1064 (Fla. 1983); Perl v. St. Paul Fire & Marine Ins. Co., 345
N.W.2d 209, 216 (Minn. 1984); ; Malanga v. Mfgs. Cas. Ins. Co., 146 A.2d 105, 108–10 (N.J. 1958); Aetna
Cas. & Sur. Co. v. Craig, 771 P.2d 212, 215–16 (Okla. 1989); Esmond v. Liscio, 224 A.2d 793, 800 (Pa.

[15] Sharp v. Daigre, 555 So. 2d 1361, 1364 (La. 1990) (mentioning but not applying broad rule to general
liability insurance); Jaramillo v. Providence Wash. Ins. Co., 871 P.2d 1343, 1351–52 (N.M. 1994); Carr v.
Ford, 833 S.W.2d 68, 71 (Tenn. 1992) (holding uninsured motorist statute permits but does not require
coverage for punitive damages); Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1 (Tenn. 1964). But
see West v. Pratt, 871 S.W.2d 477, 479 (Tenn. 1994) (stating in dicta that a “clear public policy exists in
Tennessee that strongly disfavors the payment of punitive damages by uninsured motorist carriers to their

[16] Tuttle v. Raymond, 494 A.2d 1353, 1360 n.20, 1362 & n.25 (Me. 1985) (citing Braley v. Berkshire Mut.
Ins. Co., 440 A.2d 359, 361–62 (Me. 1982)); Santos v. Lumbermens Mut. Cas. Co., 556 N.E.2d 983, 990, 991
n.17 (Mass. 1990).

[17] Nebraska does not allow recovery of exemplary damages. Distinctive Printing & Packaging Co. v. Cox,
232 Neb. 846, 857 (Neb. 1989) (citing Neb. Const. art. VII, § 5; Miller v. Kingsley, 230 N.W.2d 472, 474 (Neb.
1975) (“It is a fundamental rule of law in this state that punitive, vindictive, or exemplary damages are not

[18] “In weighing the interest in the enforcement of a term, account is taken of (a) the parties’ justified
expectations, (b) any forfeiture that would result if enforcement were denied, and (c) any special public
interest in the enforcement of the particular term.” Restatement (Second) of Contracts § 178(2).

[19] “In weighing a public policy against enforcement of a term, account is taken of (a) the strength of that
policy as manifested by legislation or judicial decisions, (b) the likelihood that a refusal to enforce the term will
further that policy, (c) the seriousness of any misconduct involved and the extent to which it was deliberate,
and (d) the directness of the connection between that misconduct and the term.” Restatement (Second) of
Contracts § 178(3).

[20] See, e.g., Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 559 (Tex. 2006) (holding that agreement
between lawyer and client providing for termination fee was against public policy); PPG Indus., Inc. v.
JMB/Houston Ctrs. Partners Ltd. P’ship, 146 S.W.3d 79, 82, 87 (Tex. 2004) (holding that assignment of claims
for violations of the Texas Deceptive Trade Practices–Consumer Protection Act was against public policy);
Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 205 (Tex. 2002) (holding that lawyer fee-sharing
agreement was against public policy); State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696, 698, 705
(Tex. 1996) (holding that insured’s prejudgment assignment of claims against liability insurer was against
public policy); Zuniga v. Groce, Locke & Hebdon, 878 S.W.2d 313, 316 (Tex. App.—San Antonio 1994, writ ref’
d) (holding that assignment of legal malpractice claims was against public policy); Elbaor v. Smith, 845 S.W.2d
240, 241 (Tex. 1992) (holding that Mary Carter agreements, in which the defendant receives assignment of
part of plaintiff’s claim and both remain parties at trial were against public policy); Desantis v. Wackenhut
Corp., 793 S.W.2d 670, 681 (Tex. 1990) (holding that unreasonable non-competition agreement was against
public policy); Juliette Fowler Homes, Inc. v. Welch Assocs., 793 S.W.2d 660, 663 (Tex. 1990) (same); Int’l
Proteins Corp. v. Ralston-Purina Co., 744 S.W.2d 932, 934 (Tex. 1988) (holding that assignment of plaintiff’s
claims against one tortfeasor to another tortfeasor was against public policy); Ethyl Corp. v. Daniel Constr.
Co., 725 S.W.2d 705, 708 (Tex. 1987) (holding that indemnity against one’s own negligence was against
public policy without express language); Trevino v. Turcotte, 564 S.W.2d 682, 690 (Tex. 1978) (holding that
assignment of right to challenge will to one who had taken under will was against public policy); Crowell v.
Housing Auth. of Dallas, 495 S.W.2d 887, 889 (Tex. 1973) (holding that lease provision exempting landlord
from tort liability to tenants was against public policy); Hooks v. Bridgewater, 229 S.W. 1114, 1118 (Tex. 1921)
(holding that contract transferring custody of a child in exchange for permitting the child to inherit from the
transferee was against public policy).

[21] Many of the other “remote” categories of damages reflected in previous exemplary damage awards are
now available, or explicitly unavailable, by Legislative enactment rather than as a component of exemplary
damages. See, e.g., Tex. Bus. & Com. Code § 17.50(d) (prevailing consumers “shall” recover attorney’s fees
under the Texas Deceptive Trade Practices Act); Tex. Civ. Prac. & Rem. Code § 41.001(4) (“‘Economic
damages’ means compensatory damages intended to compensate a claimant for actual economic or
pecuniary loss; the term does not include exemplary damages or noneconomic damages.”) (emphasis added);
id. § 41.001(12) (“‘Noneconomic damages’ means damages awarded for the purpose of compensating a
claimant for physical pain and suffering, mental or emotional pain or anguish, loss of consortium,
disfigurement, physical impairment, loss of companionship and society, inconvenience, loss of enjoyment of
life, injury to reputation, and all other nonpecuniary losses of any kind other than exemplary damages.”)
(emphasis added); see also New Amsterdam Cas. Co. v. Tex. Indus. Inc., 414 S.W.2d 914, 915 (Tex. 1967)
(restating “the rule that statutory provisions for the recovery of attorney’s fees are in derogation of the
common law”). These Legislative enactments demonstrate the punitive nature of exemplary damages.

[22] Milligan v. State Farm Mut. Auto. Ins. Co., 940 S.W.2d 228, 232 (Tex. App.—Houston [14th Dist.] 1997,
writ denied), overruling Home Indemnity Co. v. Tyler, 522 S.W.2d 594 (Tex. Civ. App.—Houston [14th Dist.]
1975, writ ref’d n.r.e.); State Farm Mut. Auto. Ins. Co. v. Shaffer, 888 S.W.2d 146, 149 (Tex. App.—Houston
[1st Dist.] 1994, writ denied); Vanderlinden v. USAA Prop. & Cas. Ins. Co., 885 S.W.2d 239, 242 (Tex. App.—
Texarkana 1994, writ denied); Gov’t Employees Ins. Co. v. Lichte, 792 S.W.2d 546, 549 (Tex. App.—El Paso
1990), writ denied, 825 S.W.2d 431 (Tex. 1991) (per curiam).

[23] See also Hammerly Oaks, Inc. v. Edwards, 958 S.W.2d 387, 391 (Tex. 1997) (stating that “the general
rule in Texas” is set out in Restatement of Torts § 909 (1939): “Punitive damages can properly be awarded
against a master or other principal because of an act by an agent if, but only if, (a) the principal authorized
the doing and the manner of the act, or (b) the agent was unfit and the principal was reckless in employing
him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or
(d) the employer or a manager of the employer ratified or approved the act.”).

[24] Similarly, the court of appeals in Westchester Fire Insurance Co. v. Admiral Insurance Co., made a limited
holding that exemplary damages in a case involving grossly negligent treatment of a nursing home resident
were, under the applicable statute in effect when the underlying suit against the insured was settled,
insurable. 152 S.W.3d 172, 176 (Tex. App.—Fort Worth 2004, pet. filed). The primary carrier filed a motion for
partial summary judgment, arguing that Texas public policy prohibits insurance coverage of exemplary
damages. The trial court concluded that any coverage for exemplary damages under the policy was void. The
court of appeals reversed, deciding that Texas public policy at the times relevant to the underlying case did
not preclude coverage for exemplary damages under the primary carrier’s policy. Id. at 189–90.