United States: Fifth Circuit Leaves Open Decision Of Whether Liability Policies In Texas Afford Coverage Of Punitive Damages

(February 2020) - In Frederking v. Cincinnati Insurance Company, No. 18-50536 (5th Cir. July 2, 2019), the Fifth Circuit reversed a lower court ruling that resulted in a liability policy's coverage of punitive damages. Carlos Xavier Sanchez was driving under the influence of alcohol when he failed to yield the right-of-way and collided with another vehicle, injuring Richard Brett Frederking. At the time, Sanchez was driving a truck assigned to him by his employer, Advantage Plumbing Services. Advantage, in turn, was insured by Cincinnati Insurance Company.

Frederking sued both Sanchez and Advantage in Texas state court. The jury found that Sanchez' conduct was grossly negligent, and that Advantage negligently entrusted Sanchez with the vehicle. The jury held Sanchez and Advantage jointly and severally liable for compensatory damages, and awarded Frederking exemplary damages for Sanchez' gross negligence.

Cincinnati agreed to pay the compensatory damages award, but not the exemplary damages. Frederking then brought suit against Cincinnati for recovery of the punitive damages award. Specifically, Frederking sued Cincinnati for breach of contract and for declaratory relief. In turn, Cincinnati moved for summary judgment on several grounds, namely: (1) Sanchez was not a covered "insured" at the time of the collision; (2) Sanchez' grossly negligent conduct was not a covered "accident"; (3) the exemplary damages award was uninsurable as a matter of contract and public policy; and (4) Cincinnati had no duty to indemnify Sanchez. The trial court granted summary judgment in favor of Cincinnati, and Frederking appealed.

On appeal, the Fifth Circuit's entire focus and analysis was predicated upon whether driving while under the influence may qualify as an "accident." The court did not address or mention the insurability of punitive damages under Texas law. Although Cincinnati thoroughly briefed and addressed the issue of insurability of punitive damages and Texas' public policy on the insurability of punitive damages, because the court reversed on the issue of "accident," it did not address or mention the punitive damages issue. Instead, the court reversed the grant of summary judgment and remanded for further proceedings.

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