In Farmers Texas County Mutual Insurance Company v. Zuniga, the Court of Appeals in San Antonio, Texas assessed whether the insuring agreement, which contained a promise to "pay damages for bodily injury," encompassed punitive damages. Zuniga, the Plaintiff in the underlying lawsuit, was struck by a vehicle while walking to school. The jury found the driver negligent and grossly negligent and awarded Zuniga $93,244.91 in actual damages and $75,000.00 in punitive damages. Farmers refused to pay the punitive damages award and Zuniga received assignment from the underlying defendant to recover.
The subject policy did not define "damages," "bodily injury," or "damages for bodily injury" and thus the Court sought to ascertain the plain meaning of the terms to construe the policy. The Court cited to the Black's Law Dictionary definition for "damages"—"[m]oney claimed by, or ordered to be paid to, a person as compensation for loss or injury." With regard to "damages for bodily injury," the Court cited to the definition of "for" which was defined as "in exchange as the equivalent of" and focused on the distinction between compensatory and punitive damages.
The Court concluded the "policy's promise to pay damages for bodily injury was Farmers' commitment to pay a sum of money as compensation in exchange as the equivalent of the physical damage to the injured person's body" and did not encompass punitive damages, which are aimed at retribution and deterrence. In short, the Court found only one reasonable interpretation: "a promise to pay a sum of money as compensation for the bodily injuries sustained by an injured person."
Importantly, the Court distinguished policy language providing the insurer promises "to pay all sums which the insured shall become legally obligated to pay as damages because of . . . bodily injury" from the language of the subject policy, which provided Farmers promised to pay "damages for bodily injury." Under Texas law, the former insuring agreement language has been held to include coverage for punitive damages. However, other Texas appellate courts have found the latter language to also encompass coverage for punitive damages.
The Texas Supreme Court has adopted a two-pronged approach for assessing whether an insurance policy covers punitive damages. First, courts are instructed to review the plain language of the policy. Secondly, they must assess public policy considerations if the policy language is ambiguous. It is not yet clear what particular policy language must be present in order to include or exclude coverage for punitive damages. As such, insurers should not assume punitive damages are excluded from coverage in Texas.
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