Insuring punitive damages in Texas - yes? Or no?

Writing in the September newsletter of the Reinsurance, Excess and Surplus Lines Committee, Robert D. Allen of the Dallas office of Baker & McKenzie brings his readers up to date on Texas:

Texas, the second most populous of the United States, has long been a hot area for tort and insurance coverage and bad faith litigation. The pendulum swing from enactment of liberal, pro-plaintiff statutes and the issuance of similar Texas Supreme Court case law that characterized the 1970s and 80s have given way to recent more conservative, defense-oriented jurisprudence. The issue of whether it is against Texas public policy to insure punitive damages has hit center stage.

Although Texas on the whole now recognized as one of the more conservative jurisdictions, there are certain venues in Texas that are widely known for their pro-plaintiff tendencies. From these have come some notable jury verdicts and punitive damage awards. There also have been some notable punitive damage awards in less notorious Texas venues as well. And, it is not unusual for cases nearing or during trial to settle with a punitive damage component--that is, for a premium in excess of the actual damage value.

The law of punitive damages has been the subject of intense scrutiny and reform, not only in Texas but nationally. In Texas, this reform began in earnest with the decision in the landmark case, Transportation Insurance Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994), an insurance bad faith case. Moriel, authored by former Texas Supreme Court justice and now U.S. Senator John Cornyn, re-defined the standards for awarding punitive damages, declaring that is the purpose of punitive damages in Texas "is to ensure that defendants who deserve to be punished in fact receive an appropriate level of punishment." Recently, the U.S. Supreme Court weighed in on punitive damages in State Farm Mutual Automobile Insurance Co. v. Campbell, 123 S.Ct. 1513 (2003). Perhaps the most profound impact of Campbell opinion is Justice Kennedy's statement that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process."

A change in the scenery

In Texas until Moriel, the case law of on n insurability of punitive damages uniformly held that they were insurable. American Home Assurance Co. v. Safway Steel Products Co., 743 S.W.2d 693, 704-05 (Tex.App. 1987); Dairyland County Mutual Insurance Co. v. Wallgren, 477 S.W.2d 341, 342-43...