Opinion ID: 2834382
Heading Depth: 4
Heading Rank: 4

Heading: the employer or a manager of the employer ratified or approved the act.

Text: 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 omitted). 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 –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  & 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 –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  (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.