Coverage for Punitive Damages: You May Not Get What You Pay For

Once an insurance policy has been purchased and is gathering dust in a file drawer, all questions about the type of coverage that it provides are supposed to be over. Such questions should have been addressed and resolved before the premium was set, the policy was written, and the policyholder’s check was cashed.

Yet, in certain circumstances, the scope of an insurance policy can change long after the policy was bought and paid for. One such circumstance is when courts suddenly decide that a particular type of coverage – a type that has been sold for years – now offends public policy and is unenforceable.

This issue is on the front burner in Texas with regard to the question of insurance coverage for punitive damages. Even though lower courts in Texas have held that such coverage is allowed, the U.S. Court of Appeals for the Fifth Circuit recently submitted a certified question about this issue to the Texas Supreme Court. In early November, that court heard heated arguments from policyholders and insurance companies about whether it offends public policy to allow such coverage. As of the date of publication, the case – Fairfield Insurance Co. v. Stephens Martin Paving -- had not yet been decided.