IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 04-20389

AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE

COMPANY

Plaintiff - Counter Defendant -

Appellee - Cross-Appellant

v.

RES-CARE INC; ET AL

Defendants

RES-CARE INC; TEXAS HOME MANAGEMENT INC

Defendants - Counter Claimants -

Appellants - Cross-Appellees

Appeals from the United States District Court 

for the Southern District of Texas

Before REAVLEY, HIGGINBOTHAM, and GARZA, Circuit Judges.

REAVLEY, Circuit Judge:

We are confronted in this case with an insurance coverage and

apportionment dispute in which both the insurer and the insured have appealed

from the district court’s judgment after a bench trial. The insurer, American

International Specialty Lines Insurance Company, sued its insured, Res-Care,

Inc., for breach of contract arising out of a non-waiver agreement that the

parties executed in connection with the settlement of an underlying wrongful

United States Court of Appeals

Fifth Circuit

F I L E D

June 2, 2008

Charles R. Fulbruge III

Clerk
No. 04-20389

2

death suit against Res-Care. After American settled the underlying suit for $9

million, it sought reimbursement from Res-Care pursuant to the non-waiver

agreement. The district court conducted an allocation trial to apportion the

settlement between covered and uncovered claims and entered judgment against

Res-Care for $5 million. We hold that Texas public policy bars punitive damages

coverage in this case and AFFIRM the district court’s judgment.

I. Background

Res-Care and its subsidiary, Texas Home Management, Inc., (collectively

“Res-Care”) operate Appleridge, a group-home in Houston, Texas, that provides

services for mentally disabled individuals. From July 1, 1997, through July 1,

1998, American insured Res-Care through a Hospital Professional Liability and

Commercial General Liability Policy (the “primary policy”) and a Commercial

Umbrella Policy (the “umbrella policy”). The primary policy provided coverage

for, inter alia, damages due to bodily injury caused by an “occurrence,” which

was defined as “an accident, including continuous exposure to substantially the

same general harmful conditions.” The primary policy had a coverage limit of

$1 million. The umbrella policy provided coverage for “loss in excess of the

retained limit . . . which the insured shall become legally obligated to pay as

compensatory damages” due to, inter alia, personal injury. The umbrella policy

had a limit of $15 million. Both the primary and umbrella policies excluded from

coverage damages arising from intentional acts. The umbrella policy also

excluded from coverage damages payable by the insured as punitive or

exemplary damages. Res-Care maintained similar annual primary and umbrella

policies with American from July 1993 to July 1998.

From June 1, 1992, until her death on April 16, 1998, Trenia Wright, a 37-

year old woman with cerebral palsy and mental disabilities, lived at Appleridge.

On the evening of Sunday, April 12, 1998, Wright fell in the hallway and

defecated on the floor. Vickie Kennerly, an employee at Appleridge, poured a
No. 04-20389

3

mixture of undiluted bleach and another cleaner onto the floor and escorted

other residents outside, leaving Wrightinside the home. Wright was later found

clad only in a T-shirt lying in the feces and the bleach, where she had been left

for over one hour, and possibly for several hours, while Kennerly ate pizza

outside. Although Wright apparently called for help, no one assisted her in

getting up. Wright later told other residents that Kennerly had poured bleach

directly onto her and had “set her on fire.” When Kennerly eventually returned

inside the house, she dragged Wrightinto the bathroom and cleaned the hallway

floor, but she did not wash the bleach off of Wright. Kennerly left the facility

soon afterward when her shift ended.

Two other staff members later found Wright on the floor in the bathroom

and put her to bed in clean clothes. The staff put Vaseline on Wright, but they

did not attempt to wash the bleach off of her. Although she had chemical burns

on her legs, arms, stomach, and back, Wright received little medical care in the

following days. She was not taken to the facility’s doctor, Dr. Yalamanchili, until

approximately 17 hours after the incident. Dr. Yalamanchili diagnosed Wright

with only superficial burns. He prescribed pain medication and recommended

whirlpool treatments, which were not provided. The pain medication was not

given to Wright until almost 24 hours after she sustained the chemical burns.

A facility LVN examined Wright late in the afternoon on April 13, 1998,

and was shocked by Wright’s burns and surprised that the doctor had diagnosed

only superficial wounds. A facility RN also saw Wright that day and observed

the burns on Wright’s arms. The RN did not fully assess Wright because Wright

had been seen by the doctor and never followed-up on Wright’s condition after

April 13.

Wright’s skin began peeling off in patches, and Wright began drinking a

lot of water, a sign of dehydration from the chemical exposure. In the early

morning hours of April 15, 1998, Wright fell out of bed and was found
No. 04-20389

4

unresponsive. She was taken to the emergency room and diagnosed with

extensive chemical burns. On the morning of April 16, 1998, Wright died from

complications due to the severe burns, which covered over 40% of her body.

Kennerly was later convicted in state court of recklessly causing bodily injury to

a disabled individual.

In June 1998, Wright’s family filed a wrongful death and survival suit for

compensatory and punitive damages against Res-Care,the hospital,the treating

physicians, and four Res-Care employees, including Kennerly. American

assumed the defense of Res-Care. In February 2000, the Wright plaintiffs

demanded $16 million to settle the suit, and on February 25, 2000, American

issued its first reservation of rights letter. The Wright plaintiffs settled their

claims against the hospital and treating physicians for $1,085,000 in March

2000.

Over the next few months, Res-Care urged American to settle the claims

against it, while American urged Res-Care to bear part of any settlement

because it believed a settlement would necessarily include claims for uncovered

punitive damages. In April 2000, the Wright plaintiffs filed their fourth

amended complaint in which they asserted an additional allegation that Wright

had suffered “ongoing neglect and abuse and sustained repeated personal

injuries” since she first arrived at Appleridge in 1992, which prompted another

reservation of rights letter from American.

On July 19, 2000, the Wright plaintiffs filed their ninth amended

complaint against Res-Care in which they alleged a total of 75 claims for injuries

that Wright allegedly suffered from 1993 to 1998. The additional injuries

allegedly occurred on different specified dates and were distinct from the April

12, 1998 incident.

On August 1, 2000, American and Res-Care executed a separate nonwaiver agreement that authorized American to seek a settlement of the Wright
No. 04-20389

5

suit. Prior to the execution of the agreement, American believed that coverage

under its policies would be limited to Wright’s actual damages, which it

estimated would be no more than $2.5 million. It refused to make a settlement

offer above that amount.The parties acknowledged in the non-waiver agreement

that the Wright plaintiffs were seeking both compensatory and punitive

damages and that American believed it was responsible under the policies for

only actual damages, but that Res-Care believed American had had an

opportunity to settle all claims within the available coverage limits. The parties

agreed that if American was able to negotiate a settlement with the Wright

plaintiffs, American “shall then have a right to proceed with a claim for

recoupment from the Res-Care Defendants of all sums paid by [American]

attributable to any claims not covered under the applicable Policies.”

Thereafter, American settled the Wright suit for $9 million and paid that sum

to the Wright plaintiffs.

American then sought recovery in the district court for breach of contract

under the non-waiver agreement. American contended that Res-Care breached

the agreement by refusing to reimburse it for uncovered claims paid as part of

the Wright settlement. The district court conducted a bench trial to apportion

the settlement between covered and uncovered claims pursuant to Enserch

Corporation v. Shand Morahan & Company, 952 F.2d 1485 (5th Cir. 1992).

American contended attrialthatthe actual damages in the Wright lawsuit

were between $2 and $3.5 million, while Res-Care contended that the entire $9

million settlement represented actual damages. The district court determined

that the portion of the settlement for the Wright plaintiffs’ actual damages was

$4 million and that punitive damages were $5 million. The district court

determined that the entire $9 million was settlement of the claim for the April

12, 1998 bleach incident. The court held that the additional 74 claims first

alleged on the eve of trial in the Wright plaintiffs’ ninth amended complaint did
No. 04-20389

1

In re Luhr Bros., Inc., 325 F.3d 681, 684 (5th Cir. 2003). 

2 Abner v. Kansas City S. R.R. Co., 513 F.3d 154, 168 (5th Cir. 2008).

3 Texas Ass’n of CountiesCounty Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d

128, 135 (Tex. 2000). 

6

not substantially factor into the settlement. As punitive damages were not

covered under the umbrella policy, the district court entered judgment for

American for $5 million.

Res-Care has appealed the district court’s judgment. American has filed

a cross-appeal.

II. Discussion

After a bench trial, we review legal conclusions and mixed questions of law

and fact de novo.

1 We review evidentiary rulings for an abuse of discretion.2

A. Evidence in the allocation trial

We begin with Res-Care’s claims. It argues first that the district court

erroneously considered evidence in the allocation trial that would not have been

admissible during trial of the underlying wrongful death suit. Specifically, it

challenges the district court’s consideration of Kennerly’s state-court conviction

and the testimony of American’s expert as to the reasonable settlement value of

the Wright plaintiffs’ actual damages. Res-Care asserts that the district court

improperly found that American met its burden of proof in allocating the

damages between covered and non-covered claims. We disagree with Res-Care’s

contentions.

In Texas, when there is a dispute as to coverage, an insurer faced with a

settlement demand within the policy limits may fund the settlement of an

underlying action and seek reimbursement from the insured “only if it obtains

the insured’s clear and unequivocal consent to the settlement and the insurer’s

right to seek reimbursement.”3 Here, Res-Care unequivocally consented to the

settlement and agreed in the non-waiver agreement that American retained its
No. 04-20389

4 Enserch, 952 F.2d at 1494.

5

Id.

6

Id. at 1495.

7

Id.

8

Id. at 1494–95. 

7

rightto seek reimbursement. The non-waiver agreement satisfied the conditions

of Matagorda County and permitted American to seek reimbursementfrom ResCare for uncovered claims that were included in the settlement with the Wright

plaintiffs.

In a dispute between an insurer and its insured concerning an underlying

settlement that may have included both covered and non-covered claims under

the insurance policy, it is appropriate for the district court to make findings

necessary to apportion the settlement between damages that the insurer owes

and damages for which the insured has a duty to pay.4 The district court’s job

is not to retry the underlying suit.5

In the allocation trial, the trier of fact “can consider any facts that could

have been considered in the [underlying] lawsuit itself.”6“The trial court, of

course, will have considerable leeway in deciding what facts are truly relevant

to the apportionment decision, and can thereby (we hope) prevent a full-blown

retrial of the [underlying] lawsuit.”7

Res-Care contends that Enserch necessarily limited the district court to

considering only the evidence that would have been admissible in a trial of

Wright’s underlying wrongful death suit. We do not agree with such a narrow

reading of our Enserch decision. Enserch recognized that the apportionment

decision is a particularly difficult one, and it noted a lack of case law providing

specific guidance on how to proceed.8In attempting to provide such guidance for

district courts, we did not state that the district court would be limited to the
No. 04-20389

9

Id. at 1495.

10 See id.

11 1 ALLAN D. WINDT, INSURANCE CLAIMS AND DISPUTES § 6:31 (5th ed. 2008). 

12 See Am. Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 31 (1st Cir.

1986) (holding that “in any post facto analysis of settlement claims, if the district court is to

make an allocation of the settlement amount, it should accept whatever evidence is available

regarding the intent behind the settlement decision”). 

13 Enserch, 952 F.2d at 1495. 

8

evidence admissible in the underlying suit. Rather, Enserch gave district courts

“considerable leeway” to decide what facts are relevant to the apportionment

decision. The effect of this “leeway” is to expand, not contract, the district’s

discretion in considering apportionment evidence. As with all evidence, the key

to apportionment evidence is whether it is “truly relevant.”9

It is important to remember that the goal of the allocation trial is not to

conduct a full blown retrial of the merits of the underlying plaintiff’s claims, but

rather to determine what portion of the settlement was reasonably intended to

concern claims covered by the policy at issue.10 The question is how the parties

viewed the merits of the plaintiff’s claims at the time of the settlement.11 To

determine a reasonable allocation from the viewpoint of the settling insurer (or

insured), all information influencing the settlement decision is potentially

relevant. This information might include internal memoranda, correspondence

between the insurer and insured, communications with the injured party,

investigative reports and statements, and even assessments of how sympathetic

the plaintiffs would be at trial.12 As noted above, the district court has

considerable leeway in deciding the relevance issue.13 Therefore, the district

court was not limited here to consideration of the evidence admissible in the

underlying wrongful death suit.
No. 04-20389

14 See FED. R. CIV. P. 61 (“the court must disregard all errors and defects that do not

affect any party’s substantial rights”).

15 Kennerly v. State, 40 S.W.3d 718, 721 (Tex. App. 2001). 

16 See State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 378 (Tex. 1993). 

17 See Utah Power & Light Co. v. Fed. Ins. Co., 724 F. Supp. 846, 850–51 (D. Utah 1989)

(refusing to permit experts’ evidence as to whether settlement included punitive damages

where to do so would amount to a retrial of plaintiffs’ case and a battle of the experts). 

9

With respect to the specific evidence challenged by Res-Care (Kennerly’s

conviction and the expert opinion on actual damages), we conclude that any

error was harmless.14 The district court found that Kennerly’s conviction and

the state appellate court’s opinion affirming the conviction established the

intentional nature of Kennerly’s misconduct. Kennerly’s state indictment

charged her with “unlawfully” and “recklessly” causing serious bodily injury to

a disabled individual, a violation of TEX. PENAL CODE § 22.04. The Texas Court

of Appeals held that Kennerly’s conduct was reckless by omission.15 We agree

with Res-Care that the mere fact of Kennerly’s conviction for reckless conduct

did not conclusively establish an intentional act under Texas law.16 Although

the court referred to Kennerly’s conduct as intentional, however,the courtfound

actual damages covered under the policies to be $4 million. After determining

that the Wright plaintiffs’ actual damages were reasonably $4 million, the court

concluded that $5 million should be attributed to punitive damages. As

discussed below, we cannot say that the court’s determination was erroneous

under the circumstances of this case.

We also agree that the opinion of American’s expert as to the value of the

Wright plaintiffs’ actual damages had limited evidentiary weight.17

Nevertheless, there is no showing that American’s expert testimony as to the

value of actual damages substantially affected the district court’s decision.

American’s expert, Alice Oliver-Parrott, opined from a review of the evidence
No. 04-20389

18 See Dresser-Rand Co. v. Virtual Automation, Inc., 361 F.3d 831, 842 (5th Cir. 2004)

(holding that “this Court is bound to disregard any errors, including the admission of expert

testimony, that do not affect the substantial rights of the parties”); Eiland v. Westinghouse

Elec. Corp., 58 F.3d 176, 180 (5th Cir. 1995) (holding that “admission or exclusion of expert

testimony is a matter left to the discretion of the trial court, and that decision will not be

disturbed on appeal unless it is manifestly erroneous”).

19 State Farm Lloyds, Inc. v. Williams, 791 S.W.2d 542, 550 (Tex. App. 1990). 

10

and her experience as a lawyer and former state judge thatthe Wright plaintiffs’

actual damages had a reasonable settlement value of between $2 million and

$3.5 million. The district court discounted Oliver-Parrott’s opinion, however,

because the court disagreed with her premise that Wright had no conscious pain

and suffering and that Wright’s surviving 9-year old son had no viable claim for

loss of companionship. The district court attributed more of the settlement

amount to covered actual damages than Oliver-Parrott. Therefore, we conclude

that error, if indeed there was any, in admitting the expert’s opinion was

harmless.18

B. Waiver and estoppel

Res-Care next argues that the district court erroneously precluded itfrom

presenting evidence thatthe doctrines of waiver and estoppel barred American’s

defense of non-coverage. It contends that waiver and estoppel defeat American’s

non-coverage claim because American provided a defense without a reservation

of rights for a year and a half.

Under Texas law, “the doctrines of waiver and estoppel cannot be used to

create insurance coverage where none exists under the terms ofthe policy.”19 An

exception to this general rule provides: “[I]f an insurer assumes an insured’s

defense without declaring a reservation of rights or obtaining a non-waiver

agreement, and with knowledge of facts indicating non-coverage, all policy
No. 04-20389

20 Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Kitty Hawk Airways, Inc., 964 F.2d 478, 481

(5th Cir. 1992) (internal quotation marks omitted) (emphasis in original).

21 Res-Care complains that the district court initially denied both parties’ motions for

summary judgment on the waiver/collateral estoppel issue but then indicated at a pretrial

conference that American’s motion for summary judgment had been granted and that waiver

and estoppel were no longer in the case. We find no inconsistency. The district court’s written

summary judgment order held that the waiver and estoppel issue was not in the case because

Res-Care failed to show harm or prejudice. This is consistent with its remarks in the pretrial

conference. We express no opinion on the court’s finding because we conclude that the

voluntary non-waiver agreement precludes Res-Care’s reliance on waiver and estoppel.

11

defenses, including those of non-coverage, are waived, or the insurer may be

estopped from raising them.”20

Res-Care asserts that the exception to the general rule applies in this case

because, from the moment that American received the Wright lawsuit with the

allegations of intentional misconduct, American had knowledge of facts

indicating the existence of potentially non-covered claims, yet American failed

to raise a coverage question for eighteen months. The problem with Res-Care’s

contention is that it contracted beyond such a defense by voluntarily executing

the non-waiver agreement. That agreement specifically permitted American to

seek reimbursementfor non-covered claims. It provided that if American settled

the Wrightlawsuit and funded the settlement,“[t]he Res-Care Defendants agree

that [American] shall then have a right to proceed with a claim for recoupment

from the Res-Care Defendants of all sums paid by [American] attributable to any

claims not covered under the applicable Policies.” The only reasonable meaning

of this provision is that Res-Care must reimburse American for any claims

included in the settlement that are determined to be uncovered under the

policies. Although Res-Care contends that its assent to the non-waiver

agreement was “forced,” we find no merit in this contention. Res-Care was

represented at all times by competent coverage counsel and exercised a

voluntary choice to execute the non-waiver agreement.21

C. Multiple occurrences and multiple policies
No. 04-20389

22 Enserch, 952 F.2d at 1495.

12

Res-Care next argues that the district court failed to allocate damages

between covered and non-covered claims occurring in multiple policy years. It

contends that the $9 million settlement should have been allocated among all

75 injuries that Wright allegedly suffered, including those occurring on dates

apart from the bleach incident on April 12, 1998. Specifically, Res-Care notes

that the Wright plaintiffs alleged that Wright had fallen on dozens of occasions

in 1996 and 1997. It contends that those “multiple occurrences” of negligence

triggered coverage under the policies in effect for the years prior to 1998.

The district court concluded that despite the Wright plaintiffs’ amendment

to their complaint alleging additional injuries, any earlier policies were not

available. The court reasoned that under Texas law insurance policies are not

“stackable” due to multiple occurrences in multiple policy years. More

importantly, however, the court determined that the Wright plaintiffs’

allegations of injuries apartfrom the bleach incident did not substantially factor

into the settlement. This finding is key, because under Enserch the purpose of

the allocation trial was to determine the intent at settlement and the reasonable

amount attributable to covered claims.22

Res-Care asserts that Eugene Boylan, vice-president of American’s health

care complex claims group, testified that the Wright plaintiffs’ claims of

additional negligence could trigger coverage under Res-Care’s policies. Boylan

testified that the claims “potentially” were covered, but he did not state that

American definitively considered them to be covered claims. Rather, Boylan

testified that the 74 additional claims were made in the plaintiffs’ ninth

amended complaint only two weeks before the $9 million settlement occurred,

which was also only a few weeks before the scheduled start of trial. He

specifically stated that the settlement did not result because of those claims.
No. 04-20389

23 Although, as Res-Care points out, American issued a reservation of rights letter after

the Wright plaintiffs filed their fourth amended complaint in order to encompass any general

claims of negligence alleged therein apart from the April 12, 1998 incident, we do not find the

reservation of rights indicative of significant value in the specific claims of injuries alleged for

the firsttime in the ninth amended complaint. All indications are that Res-Care and American

were concerned mainly with the tragic circumstances of Wright’s death. We also do not find

persuasive Res-Care’s argumentthat AliceOliver-Parrott, American’s expert,testifiedthat the

$9 million settlement included monies to settle all 75 injuries spanning from 1993 to 1998.

Oliver-Parrott agreed only that claims for the additional injuries were released in the

settlement; she believed the claims were alleged merely as inflammatory details added on the

eve of trial. She expressly would not agree that the claims were viable, and we see no support

in her testimony for the proposition that the claims represented value in the settlement.

13

Furthermore, Res-Care’s general counsel testified that in Res-Care’s mind

Wright’s injuries on April 12, 1998, and her subsequent death were the most

serious allegations in the complaint. Counsel testified that he did not evaluate

the additional injuries and believed that many of the allegations might be false.

He stated that he did not think they were relevant to the settlement.

Although the settlement agreementin the Wright suit necessarily released

Res-Care from all the additional claims, the question in the allocation trial was

whether any part of the settlement should be reasonably attributable to those

claims. Based on our review of the record, we cannot conclude that the district

court erred in finding thatthe additional, essentially last-minute, claims did not

factor in the value of the settlement.23 Therefore, the district court did not err

by concluding that the only policies at issue were the primary and umbrella

policies in effect on April 12, 1998.

D. Punitive damages

Res-Care next argues that the district court erroneously failed to permit

coverage of punitive damages under the multiple primary policies, which are

silent as to such coverage. Because, as we concluded above, the district court

correctly determined that multiple policy periods were not at issue, Res-Care’s

contention must be limited to the primary and excess umbrella policies in effect

on April 12, 1998.
No. 04-20389

24 Id. at 660. 

25 Id. at 655.

26 Id.

14

The umbrella policy in effect on April 12, 1998, specifically excludes

punitive damages from coverage. Thus, American could seek reimbursement

from Res-Care under the non-waiver agreement for any part of the settlement

attributable to punitive damages that were paid under the umbrella policy. The

primary policy, however, which has a policy limit of $1 million, does not address

coverage for punitive damages. Therefore, if punitive damages are covered

under the primary policy, they would be limited to $1 million, and the amount

of Res-Care’s reimbursement to American might be reduced. The question is

whether the primary policy covers punitive damages.

Res-Care asserted in its opening brief that Texas law permits an insured

to recover punitive damages under the primary policy at issue here. After

briefing and oral argumentin this case,theTexas Supreme Court considered the

issue of punitive damages and public policy in Fairfield Insurance Company v.

Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008). Although it expressly

considered whether public policy precludes insurance coverage of punitive

damages in the workers’ compensation regime, the court also provided guidance

for consideration of the issue in other contexts.24 We subsequently requested

supplemental briefing from the parties.

The Texas Supreme Court established a two-step process for courts to

determine whether punitive damages are insurable. The court first asks

whether the plain language of the policy covers the punitive damages in the

underlying suit against the insured.25 Second, if the court determines that the

policy provides coverage, it determines whether Texas public policy allows or

prohibits such coverage.26 At the second step of the inquiry, the court looks to
No. 04-20389

27 Id.

15

express statutory provisions to determine whether the legislature has made a

policy decision; if the legislature has not made an explicit policy decision, the

court will then consider general public policies.27

The primary Commercial General Liability policy in this case provides

that the insurer “will pay those sums that the insured becomes legally obligated

to pay as damages because of ‘bodily injury’ . . . to which this insurance applies.”

The policy states that coverage applies for “bodily injury” that “is caused by an

‘occurrence’” and that “occurs during the policy period.” “Bodily injury” is

defined as “bodily injury, sickness, or disease sustained by a person, including

death resulting from any of these at any time.” The policy defines an

“occurrence” to be “an accident, including continuous or repeated exposure to

substantially the same harmful conditions.” A policy exclusion states that the

insurance does not apply to bodily injury that is “expected or intended from the

standpoint of the insured.”

American argues in its supplemental brief that punitive damages are

precluded from coverage at step one of the Fairfield analysis—the plain

language of the policy—because although the primary policy is silent as to

punitive damages, the umbrella policy specifically excludes them from coverage

and provides that excess coverage is not triggered unless the primary policy is

first exhausted by payment of claims that would be covered under the umbrella

policy. Since claims for punitive damages are excluded by the umbrella policy,

American reasons, they may not be used to exhaust the primary policy, and

therefore only the Wright plaintiffs’ actual compensatory damages may be

applied to the primary policy. We decline to pass on American’s policy

construction because American effectively waived its argument by not urging it

in the district court, and by relying in its primary appellate brief only on the
No. 04-20389

28 See Texas Democratic Party v. Benkiser, 459 F.3d 582, 594 (5th Cir. 2006) (issues not

raised in opening brief are generally considered waived). Although we have elected to consider

issues raised for the first time in a supplemental brief where there has been an intervening

court decision, we have done so where the decision provided an important clarification in the

law, and refusal to do so would have resulted in perpetuating incorrect law. See DSC

Commc’ns Corp. v. Next Level Commc’ns, 107 F.3d 322, 326 n.2 (5th Cir. 1997). Here, there

has been no clarification in the law with respect to the policy language upon which American

relies, and American cites decisional law that pre-dates Fairfield in support of an argument

that it could have made in its primary brief.

29 Cf. Fairfield, 246 S.W.3d at 656 (presuming policy language similar to Res-Care’s

policy covered exemplary damages sought in a suit alleging gross negligence). In light of our

presumption we also need not address American’s argument that the term “damages” in the

primary policy does not include both punitive and compensatory damages, but we note that at

least one Texas court has interpreted a similar policy provision contrary to American’s

argument. See Am. Home Assurance Co. v. Safway Steel Prods. Co., 743 S.W.2d 693, 702 (Tex.

App. 1987).

30 Fairfield, 246 S.W.3d at 656.

31 Id. at 656 & n.2. 

32 Such facilities are regulated under Chapter 252 ofthe Texas Health and Safety Code.

See TEX. HEALTH & SAFETY CODE § 252.001. Under Chapter 252, a “facility” is defined as a

home or establishment that:

16

exclusion of punitive damages under Texas public policy.28 We therefore believe

it prudent to presume that the primary policy language here encompasses

punitive damages, and we turn to the next step in the public policy inquiry,

examining legislative policy decisions.29

As noted by the courtin Fairfield,the Texas legislature has been sensitive

to the issue of insurance coverage for punitive damages and has made the policy

decision to preclude such coverage in certain circumstances.30 For example,

“health care providers” have generally been prohibited from obtaining insurance

coverage for punitive damages, although the legislature has recognized

exceptions for hospitals, nursing homes, and assisted living facilities by

permitting those entities to obtain specific endorsements for such coverage.31

Res-Care operated the Appleridge facility as an Intermediate Care Facility for

the Mentally Retarded (ICF/MR).32 The Texas legislature has not included
No. 04-20389

(A) furnishes food, shelter, and treatment or services to four or more persons

unrelated to the owner;

(B) is primarily for the diagnosis, treatment, or rehabilitation of persons with

mental retardation or related conditions; and

(C) provides in a protected setting continuous evaluation, planning, 24-hour

supervision, coordination, and integration of health or rehabilitative services to

help each resident function at the resident’s greatest ability.

TEX. HEALTH & SAFETY CODE § 252.002(4).

33 See TEX. INS. CODE § 1901.001.

34 Cf. Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172, 188 (Tex. App.

2004) (noting that prior to legislative amendments in 2001, for-profit nursing homes were not

prohibited from obtaining coverage for punitive damages under a primary policy and were not

required to obtain such coverage via specific endorsement). 

35 Fairfield, 246 S.W.3d at 663. 

36 Id. at 663–64.

37 Id. at 664.

17

ICF/MRs in the definition of “health care providers” found in the Texas

Insurance Code.33 As American concedes in its supplemental brief, such entities

have not been precluded by an explicit legislative policy decision from obtaining

insurance for punitive damages, and they are not required to obtain a specific

endorsement for such coverage.34 Thus, we next consider general public policy

and whether insurance coverage for punitive damages is precluded in this case.

In the absence of a specific legislative policy directive, courts determine

whether an agreement is unenforceable on public policy grounds “by weighing

the interest in enforcing agreements versus the public policy interest against

such enforcement.”35 The Texas Supreme Court has framed the analysis as a

consideration of the interest in freedom of contract versus the extent to which

enforcement of an agreement would frustrate important public policy.36

On one hand, Texas recognizes a “strong public policy in favor of

preserving the freedom of contract.”37 Although this freedom is not unbounded,
No. 04-20389

38 Id. at 664–65.

39 Id. at 665.

40 Id. at 666.

41 Id.

42 Id.

43 Id. at 667

44 Id. at 670.

45 Id.

18

a court may not lightly interfere with it.38 The freedom to contract between an

insured and insurer must be upheld absent strong public policy reasons for

holding otherwise.39

Opposing the freedom of contract is the purpose of punitive damages.40

The “primary purpose of exemplary damages [is] to punish and deter.”41 In its

most recent enactments on the subject, however, the Texas legislature has

downplayed the deterrence aspect of exemplary damages in favor ofthe punitive

aspect.42 “[P]unishment imposed through exemplary damages is to be directed

at the wrongdoer.”43 But the Texas Supreme Court recognized in Fairfield that

there may be instances when insurance coverage for exemplary damages should

be allowed, such as when the insured is a corporation or a business responsible

for damages due to the conduct of its employees.44 In that case, “[w]here 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.”45

Res-Care argues that its case falls squarely within these parameters for

permitting punitive damages insurance coverage for corporations and

businesses. It asserts that no public policy considerations are offended by
No. 04-20389

46 Id.

47 Id.

48 Id.

49 The allegations specifically included claims that Res-Care (1) failed to provide

adequate supervision of Wright; (2) failed to provide Wright with a safe residence; (3) failed to

inspect and correct the danger in leaving a mentally disabled client in close proximity to

bleach; (4) failed to adequately train its agents, servants, and employees; (5) negligently hired,

contracted with and/or retained agents, servants, and employees; (6) failed to follow policies

19

insurance coverage because no Res-Care officers, directors, or shareholders

participated in or had knowledge of the Wright plaintiffs’ allegations.

The Fairfield court expressed reservations, however, for “[e]xtreme

circumstances” where “extreme and avoidable conduct that causes injury” may

warrant different considerations.46 The court expressed concern that insurance

coverage for punitive damages could encourage reckless conduct.47“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.”48

We conclude that the extreme circumstances which gave pause to the

Fairfield court are present in the instant case. The Wright plaintiffs’ complaint

is rife with allegations of gross negligence for which the responsibility should not

be shifted from the defendants to the insurer. The complaint alleged that all

defendants, including Res-Care, were grossly negligentin their actions, not only

for direct participation in the bleach incident on April 12, 1998, but also for

failure to take reasonable steps to prevent the situation from occurring, and for

failure to alleviate the harm immediately afterward. The many allegations of

gross negligence on the part of Res-Care included failing to ensure a safe

environment,to properly hire and train its employees, and to ensure that Wright

received proper medical care.49 The complaint also alleged that Kennerly and
No. 04-20389

and procedures to ensure prompt medical treatment for injured clients; (7) failed to have an

active and appropriate behavior modification program in effect for Wright; (8) failed to keep

watch over Wright; (9) failed to properly and promptly access, treat, and/or refer Wright for

proper treatment for her burns; (10) failed to properly instruct personnel in the care and

treatment of mentally retarded and handicapped individuals, including Wright; (11) failed to

timely effectthe transfer of Wright to an appropriate hospital or health care provider when she

developed symptoms, conditions, and illnesses beyond the treatment capabilities of the group

home and/or the group home’s physician, Dr. Yalamanchili; (12) failed to get Wright effective

medical care; (13) failed to provide an adequate system of preventative and general care which

resulted in the delay of proper medical assessment, care, and treatment of Wright; (14) failed

to properly hydrate Wright; (15) failed to properly staff the Appleridge group home; (16) failed

to respond to emergency conditions at a time when a reasonably prudent operator of an

ICF/MR would have done so; (17) failed to provide adequate and proper funds for the care of

Wright and the group home in general; (18) negligently hired, contracted with, and retained

Dr. R.R. Yalamanchili; and (19) negligently referred clients, including Wright, to Dr. R.R.

Yalamanchili.

20

another individual permitted Wright to lie in the bleach for a prolonged period,

failed to bathe or wash the chemicals from Wright’s body, and failed to seek

appropriate medical care. It further alleged that the defendants’ conduct

violated the Texas Penal Code by recklessly and negligently causing injury to a

disabled person. 

Moreover, there were allegations that reports from the State of Texas

showed Res-Care poorly operated other facilities, thereby establishing a course

of conduct warranting exemplary damages. In Wright’s case, an investigation

by the Texas Department of Health and Human Services concluded that Wright

did not receive an assessment by medical personnel for 17 hours after her

exposure to the bleach and that, although she was seen by a nurse the following

day, she received no follow-up assessment or medical care for 34 hours until she

was sent to the emergency room. The investigation revealed that “the facility

failed to ensure that adequate and timely medical assessment and treatment as

well as follow up assessment and care were routinely provided to clients residing

in the facility.” It concluded that “[f]acility negligence is substantiated due to

the facility failing to provide prompt, adequate treatment for a client with

chemical burns who subsequently died due to complications of those burns.”
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50 Fairfield, 246 S.W.3d at 670.

51 Id.

21

Significantly, the report concluded that the failure of care evidenced systemic

problems at the facility. It therefore recommended that the Appleridge facility

be closed.

We conclude that the circumstances of Wright’s injury and death,

occurring while living in a facility with documented systemic problems of care,

were so extreme that the purposes of punishment and deterrence of conscious

indifference outweigh the normally strong public policy of permitting the right

to contract between insurer and insured.50 This case demonstrates the kind of

“avoidable conduct that causes injury” where public policy is best served by

requiring the insured to bear the costs of punitive damages.51 The district court

did not err by failing to apportion any of the punitive damages to the primary

policy.

E. American’s cross-appeal

We turn next to American’s cross-appeal. American argues first that the

district court erred by requiring it to bear the burden of proving the amount of

the settlement attributable to uncovered claims. It argues that under Texas law,

the insured bears the burden of proving that a claim falls within the scope of an

insurance policy’s insuring agreement, while the insurer bears the burden of

establishing any exclusion to coverage. Res-Care responds that the instant case

is not a suit on the insurance policy, but rather a suit for breach of contract

under a separate reimbursement agreement. According to Res-Care, American

bore the burden of proof as the breach-of-contract plaintiff. We conclude that the

district court correctly decided the allocation issue and therefore, based on the

record before us,the burden of proof is not dispositive of our decision in this case.
No. 04-20389

52 Enserch, 952 F.2d at 1495. 

53 Id.

54 Dillawn testified that before the case settled he was concerned that the suit could

produce an actual damages award of $10 million. What the damages could have been if the

case had been tried is not the proper consideration in the allocation trial. Enserch, 952 F.2d

at 1495. Furthermore, testimony from Res-Care’s general counsel that Adam Alexander and

Elizabeth D’Elia, American’s claims personnel, agreed the actual damages were between $8

and $10 million was directly contradicted by the testimony of Alexander and D’Elia, who

testified that actual damages were estimated to be $2–$3 million.

22

As noted above, the purpose of the allocation trial was for the trier of fact

to apportion the settlement between covered claims and non-covered claims.52

We conclude from a review of the record that the district court ably considered

the evidence presented and arrived at a reasonable apportionment decision.

Early on in the case, all parties recognized that if there were a trial, a

verdict could be well in excess of the policy limits and that there was a

significant risk of a very large punitive damages award. However, the district

court was not to consider what the damages award might have been had the

matter gone to trial.53 Rather, it was to determine what the parties considered

the effect of the settlement to be, which is both a different and difficult question.

Res-Care’s defense counsel, Steve Dillawn, initially estimated the covered

actual damages to be between $250,000 and $2 million, and he noted in a letter

to American that in a similar case a jury had awarded $2.37 million in actual

damages but $90 million in punitive damages.54 The only evidence of concrete

economic losses were Wright’s medical expenses of approximately $24,000. The

Wright plaintiffs’ demands for settlement began at $100 million and then

decreased to $16 million and $12.5 million before the plaintiffs agreed to the

settlement amount of $9 million. American’s claims personnel always believed

the actual damages were far less than $9 million and that any amount above the

actual damages would represent claims for which it was not responsible. ResCare presented expert testimony that actual damages could have reasonably
No. 04-20389

23

included the entire $9 million. However, American offered testimony from its

claims personnel that the Wright plaintiffs’ counsel indicated there would be no

settlement without a payment of punitive damages. Therefore, the district court

could reasonably find that the settlement included a punitive damages

component.

American never offered more than $2.5 million to settle the case before

Res-Care agreed to the non-waiver agreement. American offered testimony and

correspondence between its claims personnel and Res-Care’s counsel showing

that it believed that $2.5 million was completely covered under the primary and

umbrella policies and represented the upper limit on the actual damages. It

refused to offer anything above that amount unless Res-Care agreed to a

reimbursement agreement. In fact, American never offered to settle the case for

an amount above $2.5 million until after the reimbursement agreement was

signed. Thus, the settlement reasonably included actual damages of at least

$2.5 million.

American believed that Wright’s actual damages should be limited because

(1) Wright had a reduced earning capacity due to her physical and mental

disabilities; (2) Wright did not suffer significant pain and suffering according to

nursing staff reports; and (3) the claim of Wright’s young son for loss of

companionship was necessarily limited because the boy lived with his aunt in

Dallas and had little contact with his mother in the group home in Houston. The

district court concluded that these views were erroneous and increased the

amount of actual damages to $4 million. We cannot conclude from a review of

the record that this was an unreasonable amount for actual damages. Wright’s

chemical burns, which covered over 40% of her body, were severe. She made

statements to others in the Appleridge facility that she believed Kennerly had

“set her on fire” and that at one point it was too painful for her even to put on

her underwear. Furthermore, her son was only nine years old at the time of his
No. 04-20389

55 See Enserch, 952 F.2d at 1495.

56 TEX. CIV. PRAC. & REM. CODE § 38.001(8). 

57 Dorsett v. Cross, 106 S.W.3d 213, 217 (Tex. App. 2003). 

58 See Adams v. Unione Mediterranea Di Scurta, 364 F.3d 646, 656 (5th Cir. 2004) (“We

review awards of attorneys fees under an abuse of discretion standard.”).

24

mother’s death. All these facts support the award for compensatory damages.

We conclude that the district court fulfilled its function to reasonably apportion

the settlement amount between the covered claims for actual damages and

uncovered claims for punitive damages.55

American also argues in its cross-appeal that, as the prevailing party in

a breach of contract suit, it was entitled to an award of attorney’s fees under

state law. American contends that Res-Care breached the non-waiver

agreement by refusing to reimburse American for portions of the settlement.

Texas law provides for the recovery of reasonable attorney’s fees for a

claim based on an oral or written contract.56 A breach of contract does not occur

until “a party fails or refuses to do something he has promised to do.”57 Here, the

non-waiver agreement provided only that American retained the right to seek

recoupment of the portion of the settlement attributable to non-covered claims.

It specifically acknowledged (1) American’s claim that “a substantial portion” of

the amount claimed by the Wright plaintiffs included punitive damages for

which it was not responsible and (2) Res-Care’s denial of American’s claim.

American proceeded with its recoupment claim in the allocation trial, and ResCare was not obligated under the non-waiver agreement to pay any amount

pending the outcome of that proceeding. Therefore, because Res-Care did not

fail or refuse to do something it had promised to do, there was no breach of

contract, and the district court did not abuse its discretion by denying American

an award of attorney’s fees.58
No. 04-20389

25

Similarly, we find no merit to American’s argument that the district court

erred by failing to award it prejudgmentinterest for its breach of contract claim.

Because we conclude that there was no breach of contract, the district court did

not err by denying prejudgment interest.

The district court’s judgment is AFFIRMED.