HOUSTON COURT OF APPEALS FINDS COMPANY NOT AUTOMATICALLY ENTITLED TO COVERAGE FOR PUNITIVE DAMAGES

In Tesco,[1] the First Court of Appeals held that Tesco Corporation was not automatically entitled to coverage for punitive damages from its insurer, Steadfast Insurance Company.  The dispute arose out of a personal injury lawsuit by an employee of Tesco who worked on its drilling rig. Although Steadfast provided Tesco with a defense in this underlying lawsuit, it declined to pay the $1,500,000 that the jury awarded as punitive damages. 

After finding that the commercial general liability policy clearly covered punitive damages as those damages that Tesco “becomes legally obligated to pay,” the court turned to whether Texas public policy prohibited the enforcement of an insurance contract that covered these damages. The court revisited a Texas Supreme Court case[2] that noted that punitive damages may violate public policy if the insured is a business that is required to pay these damages for the conduct of its employees.  It found that Tesco’s summary judgment evidence did not conclusively establish the extent to which Tesco employees or management contributed to the underlying injury.  The court therefore affirmed the trial court’s denial of Tesco’s motion for summary judgment that coverage of punitive damages was enforceable under Texas public policy under the facts of this particular case.

[1] Tesco Corp. v. Steadfast Ins. Co., --S.W.3d--, 2014 WL 4257737 (Tex. App.—Houston[1st Dist.] Aug. 28, 2014).

[2] Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 655 (Tex. 2008).