Opinion
No. 01-05-01115-CV
Opinion issued October 25, 2007.
On Appeal from the 295th District Court Harris County, Texas Trial Court Cause No. 2002-14943.
Panel consists of Justices TAFT, JENNINGS, and ALCALA.
OPINION
In this insurance coverage dispute, appellant, DaimlerChrysler Insurance Company (Daimler), appeals from a judgment for breach of contract that awarded appellee, Greenspoint Dodge of Houston, Inc. (Greenspoint), $2,034,203.20 and attorney's fees. The judgment is the result of the trial court's grant of partial summary judgment in favor of Greenspoint on the grounds that Daimler breached its duty to indemnify and to defend Greenspoint, and a jury trial on the amount of damages resulting from that breach. The trial court also awarded an alternative judgment, applicable if the breach of contract judgment is reversed on appeal, in favor of Greenspoint for an unfair or deceptive act or practice. In its first four issues that concern the breach of contract judgment, Daimler contends the trial court erred by rendering partial summary judgments that Daimler had a duty to indemnify Greenspoint under the insurance policies and that Daimler must indemnify Greenspoint for punitive damages. In its fifth through seventh issues that pertain to the alternative judgment, Daimler contends that there is no evidence of extra-contractual damages and no evidence that Daimler engaged in a deceptive or fraudulent act.
Appellee Jack Apple Jr. was awarded no relief by the trial court, and seeks none in this appeal.
We conclude that the trial court did not err by granting summary judgment in favor of Greenspoint on Daimler's duty to indemnify and that public policy does not prevent the indemnification of punitive damages in this case. We therefore affirm.
Background
Greenspoint had insurance policies with Daimler for the period from August 1, 1998 to August 1, 1999, that were extended to October 11, 1999. The primary policy contained a Commercial General Liability (CGL) coverage part and Garage coverage part that was modified by an endorsement entitled "Broadened Coverage — Garages" ("broadened garage" coverage or endorsement). The limit for personal injury coverage under both the CGL and the Garage coverages of the primary policy was $1 million. The second policy, which had a $5 million limit for personal injury coverage, was the Commercial Umbrella Liability (Umbrella) policy that was triggered if (1) the primary policy did not cover an occurrence, or (2) an occurrence under the primary policy was in excess of $1 million. The policies required Daimler to defend and indemnify Greenspoint for claims for "personal injury," defined in the policies to include oral publication of material that slanders or libels a person. However, the policies excluded coverage for publication of material done by or at the direction of the insured with knowledge of its falsity.
Greenspoint made a claim under the policies after Noe Martinez, Greenspoint's inventory control manager, brought suit against Greenspoint. Martinez claimed that James Sparks, Greenspoint's controller, Mort Hall, the general manager, and Jamie Mouton, the used car sales manager, made racist and defamatory remarks about Martinez to third parties and ultimately fired him. Although Martinez was told that his position was being eliminated, he later found out that Hall's nephew replaced him as the inventory control manager. Martinez filed suit in January 2000 against Greenspoint, Sparks, Hall, Mouton, and Jack Apple Jr., Greenspoint's owner and chief executive officer. A court ordered Martinez's lawsuit to binding arbitration.
After a hearing, the arbitration panel issued an opinion and a final award. The arbitration panel ruled against Martinez on his claims for negligence, discrimination, and retaliation, and in his favor on his claims for defamation and intentional infliction of emotional distress. In its opinion, the panel found that "Martinez was defamed." The panel explained, "A statement is defamatory if the words tend to injure a person's reputation, exposing the person to public hatred, contempt, ridicule, or financial injury." The panel also found that the respondents orally published statements accusing Martinez of criminal activity, which is defamatory per se. The panel, "by way of example," found that the following defamatory statements were made:
• Mr. Satterfield and Mr. Holland both testified that Mr. Mouton told them that Mr. Martinez was a "thieving spic beaner" or "thieving Mexican";
• Mr. Holland and Mr. Hinojosa both testified that Mr. Mouton told them that the FBI was investigating Mr. Martinez;
• Mr. Satterfield testified that Mr. Mouton told him that Mr. Martinez was involved in the "Mexican connection" and federal agents were after Mr. Martinez for a murder investigation;
• Mr. Satterfield and Mr. Hinojosa testified that Mr. Sparks told them that Mr. Martinez was involved in the theft of cars from Greenspoint Dodge;
• Mr. Hinojosa was told by Mr. Mouton not to get involved with Mr. Martinez and the "Mexican connection"; and
• Mr. Holland testified that heard [sic] Mr. Hall talked about getting "rid of that thieving Mexican" when the context clearly referred to Mr. Martinez.
The panel emphasized that there was other evidence of "defamation by the Respondents," and that the above "statements, and others, made by the Respondents were plainly defamatory." The panel also found that "Respondents acted with actual malice at the time they communicated the defamatory statements" and that the Respondents "actually knew their statements to be false at the time of communication." (Emphasis in original).
Regarding Martinez's claim for intentional infliction of emotional distress, the panel noted that to prove intentional infliction of emotional distress, Martinez had to show:
(1) a person acted intentionally or recklessly; (2) the conduct was extreme and outrageous; (3) the person's actions caused another person's emotional distress; and (4) the emotional distress suffered by the other person was severe.
The panel found that "the Respondents intentionally slandered Mr. Martinez knowing, at the time, that their accusations of criminal conduct were untrue." The panel said, "This case is well 'outside the scope of an ordinary employment dispute and into the realm of extreme and outrageous conduct.'"
"Respondents" in the arbitration panel's opinion were Greenspoint, Apple, Sparks, Hall, and Mouton. The panel imposed joint and several liability on Greenspoint and the individual Respondents by considering the factors outlined by the supreme court in GTE Southwest, Inc. v. Bruce, 998 S.W.2d 605, 611-16 (Tex. 1999). In its opinion, the panel stated,
In GTE Southwest, Inc. v. Bruce, the supreme court held that, in order to recover for intentional infliction of emotional distress, a plaintiff must show: (1) the defendant acted recklessly, (2) the conduct was extreme and outrageous, (3) the actions of the defendant caused the plaintiff emotional distress, and (4) the resulting emotional distress was severe. GTE Sw., Inc., 998 S.W.2d 605, 611 (Tex. 1999). The court noted that, when determining whether certain conduct is extreme and outrageous, the context and the relationship between the parties must be considered. See id. at 612, 614. "[W]hen repeated or ongoing severe harassment is shown, the conduct should be evaluated as a whole in determining whether it is extreme and outrageous." Id. at 616. The range of behavior encompassed in "employment disputes" is broad, and includes at a minimum such things as criticism, lack of recognition, and low evaluations, which, although unpleasant and sometimes unfair, are ordinarily expected in the work environment. Id. at 613. "Thus, to establish a cause of action for intentional infliction of emotional distress in the workplace, an employee must prove the existence of some conduct that brings the dispute outside the scope of an ordinary employment dispute and into the realm of extreme and outrageous conduct." Id.
In particular, we considered (and rejected) the possibility that the individual Respondents acted out of personal animosity. We also find that the individual Respondents were vice-principals of Greenspoint Dodge at the time of the events.
In a section entitled "Allocation of Liability," the arbitration panel specifically stated that a corporation is liable for its agents who engage in defamation if the agents are vice-principals, and then found Greenspoint, Apple, Sparks, Hall, and Mouton jointly and severally liable for the actual damages and assessed separate amounts for each of them for the punitive damages. The arbitration panel awarded Martinez $994,361 in total actual damages, plus $1,150,000 in punitive damages.
Daimler provided a defense to Greenspoint during the arbitration proceedings, under a Reservation of Rights. One of the issues on which Daimler reserved its rights was the issue of whether certain employees of Greenspoint had made defamatory statements about Martinez with knowledge of their falsity. On November 13, 2001, two days after the arbitration panel issued its final award, Daimler informed Greenspoint and Apple that it would no longer defend them and would not indemnify them for the award against them. Daimler interpreted the arbitration panel's findings as not requiring the defense or indemnification of Greenspoint due to the determination that the arbitration panel found that statements were made with knowledge of their falsity. However, Daimler continued to provide a defense for Greenspoint and Apple until January 7, 2002, when the district court confirmed most of the arbitration panel's award.
The district court ordered judgment in favor of Martinez and against Greenspoint, Sparks, and Mouton, holding them jointly and severally liable for $994,361 in total actual damages, in accordance with the award by the panel of arbitrators. Also in accordance with the arbitration panel's award, the court ordered punitive damages for $500,000 against Greenspoint, $50,000 against Sparks, and $50,000 against Mouton. The court, however, vacated all of the arbitration panel's awards that were assessed against Apple and Hall.
The arbitration panel awarded Martinez $994,361 in total actual damages by finding $250,000 for general damages for injury to reputation, $216,022 for lost past earnings, $298,339 for lost future earnings, and $230,000 for mental anguish.
The arbitration panel had awarded $1,150,000 in punitive damages by assessing $500,000 against Apple, $500,000 against Greenspoint, $50,000 each against Sparks, Hall, and Mouton.
After entry of the judgment, Daimler refused to continue to defend Greenspoint in any further proceedings. Without the assistance of Daimler, Greenspoint filed a multimillion dollar bond to stay the judgment, defended garnishment actions, and retained counsel to file an appeal. While the appeal was pending, Greenspoint settled all of the claims against it for $1,750,000 and dismissed the appeal.
Martinez. v. Greenspoint Dodge of Houston, Inc., No. 14-02-00347-CV.
Believing that Daimler breached its duties under the two insurance policies, Greenspoint filed claims for breach of contract, unfair or deceptive practices or acts in violation of former article 21.21 of the Texas Insurance Code, violations of the Deceptive Trade Practices-Consumer Protection Act ("DTPA"), breach of the duty to settle, negligence, and conversion. Greenspoint attached to its petition copies of the CGL policy and the Umbrella policy.
See Act of May 10, 2001, 77th Leg., R.S., ch. 290, § 1, 2001 Tex. Gen. Laws 548, 548-51, repealed and recodified by Act of May 22, 2003, 78th Leg., R.S., ch. 1674 §§ 2, 26, 2003 Rex. Gen. Laws 3611, 2659-61 (current versions at TEX. INS. CODE ANN. §§ 541.051, 541.056 (Vernon Supp. 2006)) (hereinafter "former article 21.21").
TEX. BUS. COM. CODE ANN. §§ 17.41-.63 (Vernon 2002 Supp. 2006).
1. Insuring Agreement.
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" or offense and settle any claim or "suit" that may result. . . .
b. This insurance applies to:
(1) "Personal injury" caused by an offense arising out of your business, excluding advertising, publishing, broadcasting, or telecasting done by you or for you;
. . . .2. Exclusions.
a. "Personal injury" or "advertising injury":
(1) Arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity;
. . . .SECTION II — WHO IS AN INSURED
a. An individual, you and your spouse are insured, but only with respect to the conduct of a business of which you are the sole owner.
b. A partnership or joint venture, you are an insured. . . .
c. An organization other than a partnership or joint venture, you are an insured. Your "executive officers" and directors are insureds, but only with respect to their duties as your officers or directors. Your stockholders are also insured, but only with respect to their liability as stockholders.
a. Your "employees" other than your "executive officers," but only for acts within the scope of their employment by you or while performing duties related to the conduct of your business. However, no "employee" is an insured for:
(1) "Bodily injury"or "personal injury":
(a) To you, to your partners or members (if you are a partnership or joint venture), or to a co-"employee" while in the course of his or her employment duties related to the conduct of your business;
(b) To the spouse, child, parent, brother or sister of that co-"employee" as a consequence of paragraph (1) (a) above;
(c) Arising out of his or her providing or failing to provide professional health care services.
. . . .SECTION IV — COMMERCIAL GENERAL LIABILITY CONDITIONS
a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or "suit" is brought.
(a.) Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;
d. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services[.]
(a) Refusal to employ that person;
(b) Termination of that person's employment; or
(c) Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person. . . .
Coverage B-Umbrella Liability
. . . .
"Personal injury" or "advertising injury" which occurs within the "coverage territory" and during the "period of coverage" to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for elsewhere in this policy.
. . . .
h. Any dishonest, malicious, fraudulent, criminal or intentional act or omission; however, this exclusion does not apply to you if such act or omission was committed by your employee (other than a partner, director, executive officer or stockholder) without your direction or knowledge. [Emphasis in policy].
. . . .
(1) Arising out of oral or written publication of material, if done at the direction of you with knowledge of its falsity;
. . . .
(5) To any officer, director or employee of yours arising out of or in the course of that person's employment by you;
. . . .
(6) To any current or former officer, director or employee of yours or any applicant for employment by you arising out of your employment practices including wrongful dismissal or wrongful termination by any officer, director or employee.SECTION III — WHO IS AN INSURED
(a.) An individual, you and your spouse are insureds, but only with respect to the conduct of a business of which you are the sole owner.
(b.) A partnership or joint venture, you are an insured. Your members, your partners, and their spouses are also insureds, but only with respect to the conduct of your business.
(c.) An organization other than a partnership or joint venture, you are an insured. Your executive officers and directors are insureds, but only with respect to their duties as your officers and directors. . . .
(a.) Your employees, other than your executive officers, but only for acts within the scope of their employment by you. However, none of these employees is insured for:
(1) "Bodily injury" or personal injury" to you or to a co-employee while in the course of his or her employment;
d. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;. . . .
Partial Summary Judgment for the CGL and Umbrella Policies
Daimler filed its motion for summary judgment, asserting that (1) Daimler has no duty to indemnify Greenspoint under the terms of the policies that specifically excluded coverage under these circumstances, and (2) Daimler has no duty to indemnify Greenspoint for the punitive damages award because public policy prohibits indemnification of punitive damages. Daimler contended that the exclusion regarding defamatory statements made by the insured with knowledge of their falsity applied to Martinez's claims. Daimler asserted that because the arbitration panel found that Sparks, Hall, and Mouton were vice-principals of Greenspoint and also found that Sparks, Hall, and Mouton made the defamatory remarks with knowledge of their falsity, the knowledge must be imputed to Greenspoint, triggering the exclusion. Daimler also asserted that the Umbrella policy contained "employment-related practices" exclusions that applied to the award for Martinez. Concerning the punitive damages, Daimler asserted that "punitive damages are no longer insurable as a matter of public policy."
Daimler also moved for summary judgment on its duty to defend and Greenspoint's former article 21.21 and DTPA claims. However, Daimler does not raise an issue in this appeal concerning the duty to defend. Further, regarding the former article 21.21 and DTPA claims, Daimler does not complain about the denial of summary judgment on these grounds, but raises the trial court's alternative judgment on those claims in separate issues.
Greenspoint also filed a motion for summary judgment, asserting it was entitled to indemnity and defense under the CGL and Umbrella policies. Greenspoint contended that Daimler owed a duty to indemnify it "unless Greenspoint itself made or directed the defamatory statements." Greenspoint contended that there are differing legal tests for when a corporation may be held liable for the acts of its employees. Because the CGL and Umbrella policies do not specify which test is to be used, Greenspoint asserted that the policies are ambiguous and the interpretation most favorable to the insured must be adopted. See Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984).
Greenspoint also contended that the employment-related practices exclusion did not apply because "defamation" was not included in the definition of "employment practices." Greenspoint also responded that at least some of the defamatory statements were made after Martinez's employment terminated and, therefore, those statements were not "employment related." Alternatively, Greenspoint contended that there was a fact issue concerning which statements were made before Martinez's employment ended and which were made after.
The employment-related practices endorsement specifically listed "defamation" as an employment-related practice. The employment-related practices endorsement to the CGL coverage excludes coverage for
Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person. . . .
However, Greenspoint is correct that, under the Umbrella policy, "defamation" was not specifically listed as an employment related practice. The Umbrella policy states that coverage is excluded for personal injury "arising out of your employment practices including wrongful dismissal or wrongful termination. . . ."
The district court considered the opposing motions for summary judgment, holding as follows:
With respect to Greenspoint, the court holds that Daimler Chrysler had a duty to defend Greenspoint and that a fact issue exists as to whether an appeal was reasonable. If the appeal was reasonable, then Daimler Chrysler owes the fees for appeal. The court also holds that Daimler Chrysler had a duty to indemnify Greenspoint and breached that duty by not paying the arbitration award/ [sic] and or the settlement. Fact issues exist as to the reasonableness of the settlement and of the attorneys fees.
The Broadened Coverage-Garages Endorsement
After the trial court granted partial summary judgment on the CGL and Umbrella policies, Greenspoint amended its pleadings to specifically reference the broadened garage coverage endorsement, which provides,
BROADENED COVERAGE-GARAGES
This endorsement modifies insurance provided under the following:
GARAGE COVERAGE FORM
. . . .
Section I — Personal Injury and Advertising Injury Liability Coverage
A. COVERAGE
We will pay all sums the insured legally must pay as damages because of:
a. Personal Injury caused by an offense committed:
(1) In the conduct of your business; and
(2) In the Coverage Territory during the Policy Period.
. . . .
1. WHO IS AN INSURED
The following are insureds:
(a) You and your spouse.
(b) Your partners, if you are a partnership. None of your partners is an insured for personal injury resulting from the conduct of any other partnership.
(c) Your executive officers, directors and stockholders but only while acting within the scope of their duties.
The broadened garage endorsement does not state that it applies to employees.
. . . .
The broadened garage endorsement does not contain an employment-related practices exclusion.
This insurance does not apply to:
. . . .
2. Personal injury or advertising injury arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity.
. . . .
D. ADDITIONAL DEFINITIONS
"Personal injury" means injury, other than bodily injury, arising out of one or more of the following offenses:
. . . .
4. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organizations goods, products or services. . . .
Partial Summary Judgment on Broadened Garage Coverage
Greenspoint filed a partial motion for summary judgment, asserting that Daimler breached its duty under the Broadened Coverage-Garage Form insurance policy by failing to defend and indemnify Greenspoint for the Martinez litigation. Greenspoint's partial motion for summary judgment closely followed the grounds asserted in the partial motion for summary judgment concerning the CGL and Umbrella policies. Greenspoint asserted that because the policy defined "insured" as Greenspoint and its "executive officers, directors and stockholders," only an individual that fit into one of these classes of people could have their knowledge imputed to Greenspoint to trigger the exclusion. Therefore, the acts of Greenspoint's employees Sparks, Hall and Mouton could not be imputed to Greenspoint.
Daimler responded to that motion for summary judgment by asserting that it had no duty to defend or indemnify for the Martinez litigation under the Garage policy. Daimler expressly incorporated the grounds for summary judgment that it asserted in its motion concerning the CGL and Umbrella policies. Daimler contended that the finding by the arbitration panel that Sparks, Hall, and Mouton were vice-principals of Greenspoint establishes that the knowledge of those individuals should be imputed to Greenspoint and, therefore, the exclusion concerning defamatory statements made with knowledge of their falsity applies. Daimler also contended that public policy prohibits indemnifying Greenspoint for punitive damages.
Daimler did not assert the employment related practices exclusion. The Broadened Coverage-Garages endorsement did not contain an employment-related practices exclusion.
Daimler also responded to Greenspoint's grounds for summary judgment concerning the duty to defend. However, on appeal, Daimler limits its issues to the duty to indemnify.
Concerning the Broadened Garage coverage, the trial court granted the partial summary judgment, holding that Daimler "had a duty to defend Greenspoint" and "had a duty to indemnify Greenspoint and breached that duty by not paying the arbitration award and or the settlement."
The trial court held a jury trial to settle the remaining issues in the case. The court instructed the jury that it had already determined that Daimler failed to comply with its contract with Apple and Greenspoint when it failed to pay the judgment in the arbitration lawsuit. In accordance with the jury's verdict, the trial court, in its final judgment, ordered that Greenspoint "shall recover damages on its insurance coverage claim of $1,654,195 and prejudgment interest in the amount of $380,008.20" from Daimler. The trial court also included awards for post judgment interest, $340,000 in attorney's fees on its coverage claim, and attorney's fees for subsequent appeals.
This amount is apparently arrived by adding the $1,500,000 for the settlement amount, the $27,695 costs for the supersedeas bond, and the $126,500 in damages from Daimler's withdrawal of its defense of the arbitration lawsuit.
The jury also determined that Daimler engaged in unfair or deceptive acts or practices that caused damage to Greenspoint. In its final judgment, the trial court provided an alternative judgment pertaining to the extra-contractual claim. The court ordered,
In the alternative, if Plaintiffs' insurance coverage claim is reversed on appeal for any reason and only in that event, Plaintiff Greenspoint Dodge of Houston, Inc. shall recover damages on its Art. 21.21 (now Chapter 541 of the Texas Insurance Code) claim of $1,580,695. . . .
In the alternative judgment, the trial court also ordered prejudgment interest, post judgment interest, court costs, $385,000 in trial attorney's fees, plus appellate fees in specified contingent amounts.
Daimler's Duty to Indemnify
A. Duty to Indemnify under the Knowledge-of-Falsity Exclusion
Within issues one and three, Daimler contends that the trial court erred by granting Greenspoint's motion for summary judgment concerning Daimler's duty to indemnify Greenspoint and by denying Daimler's cross-motion for summary judgment concerning the duty to indemnify under the CGL coverage and the Umbrella policy because of the knowledge-of-falsity exclusion. In issue two, Daimler contends that the trial court erred by granting Greenspoint's partial motion for summary judgment on the duty to indemnify under the broadened garage coverage because it contained the same exclusion. Daimler states, "All three insuring agreements under which Greenspoint sought coverage for the arbitration award exclude coverage for claims resulting from acts of defamation when the statements were known to be false when made." Daimler says that the findings of the arbitration panel establish that the conduct of the individual Respondents is the conduct of Greenspoint. Daimler contends that the policies exclude coverage for the damages awarded to Martinez because the policy specifically excludes from coverage any defamatory statements that were known to be false when made. The arbitration panel found that defamatory statements were known to be false when made by Sparks, Hall, and Mouton and that Sparks, Hall, and Mouton were "vice-principals" of the corporation. Daimler asserts that because the acts of "vice-principals" are the acts of the corporation, the insurance policy does not provide coverage as it excludes coverage for statements made by the corporation that were known to be false when made.
This ground was not raised in Daimler's motion for summary judgment on the CGL and Umbrella policies. However, Daimler did raise it as a ground to oppose the summary judgment that Greenspoint sought on the broadened garage coverage. Daimler asserts that the arbitration panel found that "respondents including Greenspoint Dodge knew the statements were true." Greenspoint contends that this is an adjudicated fact that should be used to determine the duty to indemnify. See GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 310 (Tex. 2006). The facts found by the arbitration panel were that Sparks, Hall, and Mouton made the defamatory statements. Although the panel does refer to "Respondents" in several places, without specifying the individuals or Greenspoint, a reading of the opinion as a whole, with the statements identified by Daimler in their proper context, shows that the panel imposed liability on Greenspoint for the acts of Sparks, Hall, and Mouton.
Greenspoint responds that the description of who is the insured in the insurance policies should control. Greenspoint contends that the term "vice-principal . . . does not . . . fit with the language used throughout the policy (including terms such as employee, executive officer, director, etc.)." Explaining why the term "vice-principal" is not controlling here, Greenspoint states that the term is used commonly in tort law, but "the term has no necessary connection to the terms that are used in the policy when defining who is an insured." For instance, says Greenspoint, "a person might be a vice-principal but not be an executive officer or director." The motion for summary judgment states that "director" has a well-understood and specific meaning when used in the context of organizations and when itemized along with "officers" and "shareholders." Greenspoint contends that the arbitration panel's determination that Sparks, Hall, and Mouton were vice-principals of the corporation is insufficient to make any of them a director, executive officer or stockholder of the corporation, which are the terms used by the insurance policy for people who are "the insured." Greenspoint states that tort liability is assessed to advance the policy objectives of compensating victims and deterring certain types of conduct. Contract interpretation, on the other hand, is based on a very different policy objective of giving effect to the expectations of the parties to the contract.
B. Summary Judgment Standard of Review
We review summary judgments de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). When both sides move for summary judgment and the trial court grants one motion and denies the other, we review the summary judgment evidence presented by both sides and determine all questions presented. Comm'rs Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997); Cigna Ins. Co. v. Rubalcada, 960 S.W.2d 408, 411-12 (Tex.App.-Houston [1st Dist.] 1998, no pet.). We render such judgment as the trial court should have rendered. Agan, 940 S.W.2d at 81; Rubalcada, 960 S.W.2d at 412. When, as here, a summary judgment does not specify the grounds on which it was granted, we will affirm the judgment if any one of the theories advanced in the motion is meritorious. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 157 (Tex. 2004).
Summary judgment is proper only when a movant establishes that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. TEX. R. CIV. P. 166a(c). A motion must state the specific grounds relied upon for summary judgment. Id. In reviewing a summary judgment, we must indulge every reasonable inference in favor of the nonmovant, take all evidence favorable to the nonmovant as true, and resolve any doubts in favor of the nonmovant. Valence Operating Co., 164 S.W.3d at 661.
C. Law Concerning Interpretation of Insurance Policies
The plain language of an insurance policy, like that of any other contract, must be given effect when the parties' intent may be discerned from that plain language. Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203, 213 (Tex.App.-Houston [1st Dist.] 2003, pet. denied). Exceptions and rules of limitation in an insurance contract are strictly construed against the insurer. Id. However, when the language is ambiguous — that is, subject to two or more reasonable interpretations — then the construction which affords coverage must be adopted. Id. (citing Glover v. Nat'l Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1977)). The plain, ordinary, and generally accepted meanings of terms must be used, unless the policy itself shows that the parties intended a different meaning, such as by providing definitions. Id. at 208-09; see also Trinity Univ. Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997) ("[W]hen terms are defined in an insurance policy, those definitions control.").
A party's reasonable expectation of coverage is a question of law, not fact. Bituminous Cas. Corp., 110 S.W.3d at 213. To determine whether coverage is consistent with an insured's reasonable expectations, a court must interpret the language in the context with respect to its function in the policy. Id. The controlling interpretation of individual words not defined in an insurance policy is one which the ordinary person would give to the phrase as a whole, taken in the context of the whole policy. Id. at 213-14 (citing Tumlinson v. St. Paul Ins. Co., 786 S.W.2d 406, 408 (Tex.App.-Houston [1st Dist.] 1990, writ denied)).
D. Law Pertaining to Duty to Indemnify
To determine whether there is a duty to indemnify an insured, courts must look to the facts actually established in the underlying suit. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Here, the "facts actually established" were determined in the arbitration of Martinez's claims. The arbitration panel found that Sparks, Hall, and Mouton "actually knew their statements to be false at the time of communication." (Emphasis in original). Further, the panel specifically stated in its opinion that Sparks, Hall, and Mouton "were vice-principals of Greenspoint Dodge at the time of the events" underlying Martinez's claims. We must determine, therefore, how the characterization of Sparks, Hall, and Mouton as "vice-principals" of Greenspoint affects the determination of whether the policies cover Greenspoint for the Martinez litigation.
In contrast, an insurer's duty to defend is determined using the "eight-corners rule." GuideOne, 197 S.W.3d at 310. Under the eight-corners rule, the insurer's duty to defend is determined by the contents of the insurance policy and the factual allegations of the petition seeking recovery from the insured to see if those allegations potentially support a covered claim. Id. The duty to defend is generally broader than the duty to indemnify. Id. at 308.
E. Law Pertaining to Vice-Principals of Corporation
A person's "status as a vice-principal of the corporation is sufficient to impute liability to [the corporation]." GTE Sw., 998 S.W.2d at 618. Corporations can act only through their agents. Id. A vice-principal "represents the corporation in its corporate capacity, and includes persons who have authority to employ, direct, and discharge servants of the master, and those to whom a master has confided the management of the whole or a department or division of his business." Id. The Supreme Court of Texas has explained,
A 'vice-principal' encompasses four classes of corporate agents: (a) Corporate officers; (b) those who have authority to employ, direct, and discharge servants of the master; (c) those engaged in the performance of nondelegable or absolute duties of the master; and (d) those to whom a master has confided the management of the whole or a department or division of his business.
Hamerly Oaks, Inc. v. Edwards, 958 S.W.2d 387, 391 (Tex. 1997). Courts use the "vice-principal" doctrine to "distinguish between the acts of 'the corporation itself' and 'that of a mere servant or employee.'" Id. (quoting Fort Worth Elevators Co. v. Russell, 70 S.W.2d 397, 406 (Tex. 1934), overruled on other grounds by Wright v. Gifford-Hill Co., 725 S.W.2d 712, 714 (Tex. 1987)). Acts of a "mere servant or employee" are the basis for corporate liability based on the doctrine of respondeat superior. Fort Worth Elevators Co., 70 S.W.2d at 406. "The liability of the master for the negligent acts of his vice principal is placed upon very different grounds, namely, that the negligent acts of the vice principal are the very acts of the corporation itself." Id. (emphasis added); see also GTE Sw., Inc., 998 S.W.2d at 618. In GTE, the court imposed liability on a corporation for a manager's intentional infliction of emotional distress on other employees when the jury found that the manager was a vice-principal of the corporation. See GTE Sw., Inc., 998 S.W.2d at 618. F. Application of Term of Vice-Principal to the Insurance Policies
Here, the insurance policies exclude from coverage "publication of material, if done by or at the direction of the insured with knowledge of its falsity," as stated in the CGL policy and broadened garage endorsement, and defamatory statements "done at the direction of you with knowledge of its falsity," as stated in the Umbrella policy. Therefore, if "the insured" made or directed the defamatory statements with knowledge of their falsity, the policies do not provide coverage.
The broadened garage coverage specifically defines "the insured" as Greenspoint, as well as its "executive officers," "directors," and "stockholders" are insured "while acting within the scope of their duties." Sparks was the controller; Hall was the general manager; and Mouton was the used car sales manager for Greenspoint. None of them were Greenspoint's executive officers, directors or shareholders. Thus, whether the exclusion applies comes down to whether Greenspoint itself made the defamatory statements with knowledge of their falsity.
Under tort law, Greenspoint itself made the defamatory statements because the arbitration panel found that Sparks, Hall, and Mouton were vice-principals of Greenspoint at the time of the events and the acts of vice-principals are the acts of the corporation itself. See Fort Worth Elevators Co., 70 S.W.2d at 406 ("the negligent acts of the vice principal are the very acts of the corporation itself"). Greenspoint is therefore liable for the torts committed by its vice-principals. The issue here, however, is not whether Greenspoint is liable for the torts committed by its vice-principals. That issue was resolved by the arbitration panel. Rather, we must determine whether under the terms used by this insurance policy, the acts committed by the vice-principals are the very acts of the "organization," as that term was understood by the parties to the insurance policy.
Sparks, Hall, and Mouton were vice-principals of the corporation because they had "authority to employ, direct, and discharge servants of the master," and Greenspoint "confided the management of the whole or a department or division of his business" to Sparks, Hall and Mouton. See GTE Sw., 998 S.W.2d at 618.
Nothing in the agreement specifies that the knowledge of vice-principals will be considered the knowledge of Greenspoint for determining whether the exclusion concerning defamatory statements made with knowledge of their falsity applies. The people described in the policy as "the insured" in addition to Greenspoint are the "executive officers, directors and stockholders but only while acting within the scope of their duties." These are more narrowly defined than the broader term vice-principal, which includes anyone with "authority to employ, direct, and discharge servants of the master, and those to whom a master has confided the management of the whole or a department or division of his business." See GTE Sw., 998 S.W.2d at 618. Therefore, the language of the policy does not support Daimler's assertion that a vice-principal's knowledge is considered the insured's knowledge. See Trinity Univ. Ins. Co., 945 S.W.2d at 823 ("when terms are defined in an insurance policy, those definitions control").
In addition to the plain language of the broadened garage coverage, the language of the Umbrella policy is instructive. The Umbrella policy contains an exclusion for
Any dishonest, malicious, fraudulent, criminal or intentional act or omission; however this exclusion does not apply to you if such act or omission was committed by your employee (other than a partner, director, executive officer or stockholder) without your direction or your knowledge.
(Emphasis in original). Under this exclusion, Daimler and Greenspoint agreed that Greenspoint remained insured for malicious acts committed by its employees, as long as Greenspoint did not direct or know of the malicious acts. The Umbrella policy also excludes personal injury in certain circumstances. The first subsection of that exclusion removes from coverage a defamatory statement "done at the direction of you with knowledge of its falsity." The same exclusion includes a subsection that excludes defamatory statements "arising out of your employment practices including wrongful dismissal or termination by any officer, director or employee." (Emphasis added). The plain language of the latter exclusion applies to "any . . . employee," while the language of the former does not. Thus, where Daimler chose to exclude certain acts of employees from the coverage in its policies, it expressly did so.
As noted above, a party's reasonable expectation of coverage is a question of law, not fact. See Bituminous Cas. Corp., 110 S.W.3d at 213. However, as shown in GTE, determination of vice-principalship is a question of fact. GTE Sw., Inc., 998 S.W.2d at 618 (noting that jury found manager to be vice-principal). Daimler's suggestion that we use a fact inquiry created in tort law to determine the reasonable expectations of the insured, which is itself a question of law, would require that we disregard the contract language.
The supreme court recently noted that the economic-loss rule should not be used as a "policy-construction tool" because it "leads to the conclusion that 'property damage' [in an insurance policy] does not mean what the policy plainly says, but rather is code for tort damages." Lamar Homes, Inc. v. Mid-Continent Cas. Co., 50 Tex. Sup. Ct. J. 1162, 1168, 2007 WL 2459193, at * 8 (Tex. Aug. 31, 2007). The supreme court continued, "Texas law, however, requires that insurance policies be written in English, preferably plain English, not code." Id.
We conclude that although tort law imputed liability onto Greenspoint due to the actions of the vice-principals under concepts for establishing liability by a corporation, the policy's reference to knowledge by the insured means that Greenspoint itself had to actually have the knowledge. No evidence shows that Greenspoint itself knew about the defamation, and nothing in the policy language requires that Greenspoint should be treated as having the knowledge of Sparks, Hall, or Mouton. We hold that the trial court did not err by rendering summary judgment in favor of Greenspoint.
G. Case Law Referred to by the Parties
The legal authority referred to by the parties does not give much guidance on how to interpret the agreements. Greenspoint cites three cases that it contends show that, under contract law, "[a]s a general rule, for the purposes of contract liability, only acts done by an agent of the corporation who has actual, implied or apparent authority to do the particular act is binding on the corporation." The three cases cited by Greenspoint are Spring Garden 79U, Inc. v. Stewart Title Co., 874 S.W.2d 945 (Tex.App.-Houston [1st Dist.] 1994, no writ), Jorgensen v. Stuart Place Water Supply Corp., 676 S.W.2d 191 (Tex.App.-Corpus Christi 1984, no writ), and Geders v. Aircraft Engine and Accessory Co., 599 S.W.2d 646 (Tex.Civ.App.-Dallas 1980, no writ). However, none of these cases involve liability for a breach of contract, as Greenspoint contends, but rather all state the general rule that a principal can be found liable for the tort of his agent when the agent is acting within the scope of his authority. Spring Garden, 874 S.W.2d at 948; Jorgensen, 676 S.W.2d at 194; Geders, 599 S.W.2d at 650. None of these cases address the issue before the court — whether the knowledge of Sparks, Hall, or Mouton as "vice-principals" can be imputed to Greenspoint to trigger the application of the knowledge-of-falsity exclusion.
Greenspoint also contends that if the policies are ambiguous, it has posited a reasonable interpretation of the policies, and the court is therefore required to interpret the policies in a light most favorable to the insured. See Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984); Nat'l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991).
Daimler cites to Altivia Corporation v. Greenwich Insurance Co. for the proposition that there is no duty to defend under the knowledge-of-falsity exclusion when the petition alleged that defamatory statements were made by corporation's agents and were false and malicious. See 161 S.W.3d 52, 54 (Tex.App.-Houston [14th Dist.] 2004, no pet.). In Altivia, the court held that an insurance company had no duty to defend a corporation when the corporation was sued for wrongful termination and defamation. Id. at 54-55. Specifically, Altivia was sued by a former employee for responses to inquiries by other employers regarding the discharged employee, wherein Altivia falsely reported that the discharged employee, a trucker, had been involved in two accidents while employed by Altivia. Id. at 54. Altivia's insurance policy excluded coverage for "such a personal injury if done by the insured with knowledge of its falsity" and a "personal injury arising out of any termination of a person's employment or 'employment related' acts or omissions, such as defamation (the 'ERP exclusion')." Id. The court, applying the "eight-corners rule," stated,
Hidrogo's petition does not specify the context of the alleged statements or the persons by whom, time frame in which, or purpose for which the statements were allegedly made. To the extent they were alleged to be made in response to routine employment inquiries to Altivia by other prospective employers, they would be employment related acts subject to the ERP exclusion. Conversely, to the extent the statements were otherwise alleged to be made by Altivia's authorized agents, such as to subject Altivia to liability, and were false and malicious, as Hidrogo's petition alleges, they would have allegedly been made by Altivia with knowledge of their falsity and thus also outside the scope of coverage.
Id. at 54. The portion of the opinion analogous to the situation before us refers to "statements . . . alleged to be made by Altivia's authorized agents, such as to subject Altivia to liability." See id. The court does not indicate whether the insurance policy in Altivia defines who is an "authorized agent" for the purpose of insurance, nor does it speculate who is an "authorized agent." Since the very question before us is what constitutes an act of Greenspoint as defined by the insurance policy, Altivia is not instructive.
In its motion for summary judgment, Daimler also cited to two federal district court cases. Potomac Ins. Co. v. Peppers, 890 F. Supp. 634, 644 (S.D. Tex. 1995); Am. Guar. and Liab. Ins. Co. v. Shel-Ray Underwriters, Inc., 844 F. Supp. 325, 330 (S.D. Tex. 1993). These cases do not concern the duty to indemnify and do not discuss the issue before this Court concerning whether the knowledge of a vice-principal is considered the knowledge of the insured for the purposes of the exclusion.
H. Duty to Indemnify under the Employment-Related Practices Exclusion
Within its first and third issues, Daimler also contends that the trial court erred by granting Greenspoint's motion for partial summary judgment on the duty to indemnify because the policies contain an employment-related practices exclusion. Daimler contends that "both the CGL coverage and the broadened garage coverage include an employment-related practices exclusion that unequivocally excludes the Martinez claim from coverage." Later in its brief, Daimler contends, "Both the CGL coverage provided by the Primary Policy and the coverage provided by the Umbrella policy contain exclusions for claims arising out of employment-related practices." Daimler points to the primary policy that has an endorsement that is entitled "TEXAS CHANGES — EMPLOYMENT RELATED PRACTICES EXCLUSION." That endorsement excludes coverage under the CGL coverage for personal injury to any person arising out of any "[e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person." Daimler also points to the Umbrella Policy that excluded coverage for personal injury or advertising injury "[t]o any officer, director or employee of yours arising out of or in the course of that person's employment by you."
In its response on appeal, Greenspoint states that the broadened garage endorsement does not contain the employment-related practices exclusion. Daimler's reply brief does not respond to Greenspoint's claim that the employment-related practices exclusion is not contained in the broadened garage endorsement.
Although the CGL and the Umbrella policies contain the employment-related practices exclusion, the broadened garage coverage does not contain the employment-related practices exclusion. We hold that the trial court did not err by granting partial summary judgment for Greenspoint regarding the broadened garage coverage, because the broadened garage coverage did not contain the employment-related practices exclusion.
We also note that Daimler did not assert the employment-related practices exclusion in the CGL coverage as a ground in its motion for summary judgment or in response to Greenspoint's motion for summary judgment before the trial court ruled on those motions. When the trial court ruled in favor of Greenspoint in the motion for summary judgment in June 2003 by holding that Daimler breached its duty to indemnify Greenspoint under the CGL and Umbrella policies, Greenspoint did not assert that an employment-related practices exclusion was a reason to hold that there was no insurance coverage for Greenspoint under the CGL policy. The first time that Daimler claimed that there was no insurance coverage on the ground that the employment-related practices exclusion of the CGL coverage was in its "Supplemental Briefing and Motions for Clarification and Reconsideration in support of its Motion for Summary Judgment against Plaintiffs Greenspoint Doge and Jack Apple, Jr.," which was filed after the trial court granted partial summary judgment for Greenspoint and denied Daimler's motion. We cannot conclude that the trial court erred by rendering summary judgment in favor of Greenspoint when Daimler did not expressly present in its summary judgment response the grounds that it now asserts on appeal. See TEX. R. CIV. P. 166a(c) ("Issues not expressly presented to the trial court by written motion, answer or other response shall not be considered on appeal as grounds for reversal."); Rayl v. Borger Econ. Dev. Corp., 963 S.W.2d 109, 114 (Tex.App.-Amarillo 1998, no pet.) (holding that party may not appeal summary judgment in favor of opponent when grounds opposing summary judgment asserted on appeal were not raised before trial court).
Daimler only raised the employment-related practices exclusion found in the Umbrella policy as a ground for summary judgment in its favor. Daimler's only "response" to Greenspoint's motion was an objection to an affidavit filed in support of Greenspoint's motion.
Because the broadened garage coverage does not contain the employment-related practices exclusion and, as discussed above, the knowledge-of-falsity exclusion does not apply to Greenspoint under the facts of this case, the trial court did not err in rendering summary judgment for Greenspoint on the duty to indemnify under the broadened garage coverage. Because the breach of the duty to indemnify under the broadened garage coverage supports the jury questions and answers regarding Greenspoint's breach of contract damages, we need not determine whether the employment-related practices exclusion in either the CGL or the Umbrella policies apply in this case.
We overrule Daimler's issues one, two, and three concerning the breach of its duty to indemnify Greenspoint.
Exemplary Damages
In its fourth issue, Daimler asserts that, as a matter of law, an insurance company may not indemnify an insured for an award for exemplary damages. Daimler contends that the indemnification of punitive damages violates Texas public policy, which provides for punishment of wrongdoers through exemplary damages, because the wrongdoer would escape punishment through indemnification by an insurance company. We conclude that the trial court did not err by denying the motion for summary judgment by determining that (A) Texas public policy does not prohibit insurance coverage for exemplary damages in all cases; (B) the purpose of exemplary damages is not thwarted by allowing insurance coverage under these circumstances, and (C) the Powell decision, to which Daimler cites, does not compel us to deny the insurance coverage here.
A. Texas Public Policy Does Not Prohibit Insurance Coverage in Every Case
The Civil Practice and Remedies Codes defines exemplary damages as follows:
"Exemplary damages" mean any damages awarded as a penalty or by way of punishment but not for compensatory purposes. Exemplary damages are neither economic nor noneconomic damages. "Exemplary damages" include punitive damages.
TEX. CIV. PRAC. REM. CODE ANN. § 41.001(5) (Vernon Supp. 2006). The public policy behind exemplary damages is plainly articulated as punishment for a wrongdoer. See id.; see also Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 16 (Tex. 1994) ("Punitive (or exemplary) damages are levied against a defendant to punish the defendant for outrageous, malicious, or otherwise morally culpable conduct.").
The Legislature has not spoken on whether, as a general rule, punitive damages may be covered by insurance. However, in a specific instance, the legislature has determined that punitive damages may be covered by insurance. See TEX. INS. CODE ANN. § 1901.252 (Vernon 2006). The insurance code specifically allows insurance "that provides for coverage for exemplary damages" for hospitals, nursing homes and assisted living facilities. See id. Thus, insuring of punitive damages is not against public policy in all instances. See id.
The Insurance Code states,
§ 1901.252. Coverage for Exemplary Damages
(a) Except as provided by Subsection (b), a medical professional liability insurance policy issued to or renewed for a physician or health care provider in this state may not include coverage for exemplary damages that may be assessed against the physician or health care provider.
(b) The commissioner may approve an endorsement form that provides for coverage for exemplary damages for use on a medical professional liability insurance policy issued to:
(1) a hospital; or
(2) a for-profit or not-for-profit nursing home or assisted living facility.
TEX. INS. CODE ANN. § 1901.252 (Vernon 2006).
Texas courts, on a case by case basis, have disallowed insurance coverage for exemplary damages awards. See, e.g., State Farm Mut. Auto. Ins. Co. v. Shaffer, 888 S.W.2d 146, 149 (Tex.App.-Houston [1st Dist.] 1994, pet. denied) (disallowing insurance coverage for exemplary damages under uninsured motorist policy because public policy reason that wrongdoer would not be punished if coverage were allowed and because legislative intent of uninsured motorist insurance); see also Anthony H. Castillo, Liability Insurance and Punitive Damages: Does Texas Public Policy Detest this Union?, 38 ST. MARY'S L.J. 809, 818-26 nn. 54-110 (2007) (discussing various approaches of Texas courts of appeals in cases concerning insuring punitive damages).
In addition to the public policy to punish wrongdoers through exemplary damages, there are three other public policies. First is the public policy that contracts must not violate the public good. A contract is not permitted if it violates public policy, such as "if it is illegal, or is inconsistent with or contrary to the public good." Wright v. Sydow, 173 S.W.3d 534, 551 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Second is the public policy that Texas has "a strong public policy in favor of preserving the freedom of contract." Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553 (Tex. 2001) (citing Wood Motor Co. v. Nebel, 238 S.W.2d 181, 185 (1951)), superseded by statute on other grounds as stated in Storage Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004). Third is the public policy that courts should avoid interfering with the Legislature's power to define public policy by "exercis[ing] judicial restraint in deciding whether to hold arm's-length contracts void on public policy grounds." Id. Absent "clear legislative intent to prohibit agreements" courts should "decline to declare them void on public policy grounds." Id. Competing public policies "are best resolved by the Legislature, not the judiciary." Id. "A state's public policy is embodied in its constitution, statutes, and the decisions of its courts." Wright, 173 S.W.3d at 551 (quoting Ranger Ins. Co. v. Ward, 107 S.W.3d 820, 827 (Tex.App.-Texarkana 2003, pet. denied)). Although there are multiple competing public policies, there is no legislation or decision from any Texas state court that has determined that the policy of Texas is to disallow insurance coverage for exemplary damages in every case.
B. The Purpose of Exemplary Damages is Not Thwarted by Allowing Coverage
To determine whether the purpose of the exemplary damages is thwarted by allowing the insurance coverage, we examine (1) the terms of the insurance policy, (2) the pertinent statute governing the area for which the insurance was provided and the legislative intent of the statute, and (3) whether the purpose of exemplary damages, which is to punish he wrongdoer, was served by allowing the insurance coverage for punitive damages. See Shaffer, 888 S.W.2d at 149. In Shaffer, we determined that the terms of the insurance policy held by Shaffer that provided for coverage for damages caused "because of bodily injury" was ambiguous because the term could or could not include coverage for punitive damages awarded due to the bodily injury. Id. at 148-49. Next, in Shaffer, we examined the statute at issue, which was the uninsured motorist coverage required by the insurance code. Id. at 147. We noted that the code provides that no auto liability policy can be issued without providing uninsured coverage in amounts for damages that are at least the limits described in the Motor Vehicle Safety-Responsibility Act. Id. After examining the pertinent statues, we concluded that the legislative intent behind the statutes in the insurance code and the Motor Vehicle Safety-Responsibility Act "is only to provide compensatory damages to an insured party under an insured motorist policy." Id. at 149. We determined that the legislative intent behind the statute was to protect motorists from " financial loss caused by negligent financially irresponsible motorists." Id. (quoting Act of Oct. 1, 1967, 60th Leg., R.S., ch. 202, § 3, 1967 Tex. Gen. Laws 448, 449). The third factor we considered in Shaffer, was whether allowing for insurance coverage would serve the purpose of the policy for exemplary damages to serve as punishment of the wrongdoer. Id. There, the wrongdoer, Torres, was an uninsured motorist who was intoxicated when he collided with Shaffer, who had insurance coverage for damages caused by uninsured drivers. Id. at 147. We determined that the policy of punishing the wrongdoer was not served by requiring the insurance company to pay the damages since neither deterrence of wrongful conduct nor punishment of Torres was achieved by imposing exemplary damages upon Shaffer's insurance company for Torres's wrongful act. Id. at 149. Considering these factors, we held that the uninsured motorist policy did not require the insurance company to pay the punitive damages. Id.
The policy provision at issue stated,
We will pay damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by a covered person, or property damage, caused by an accident.State Farm Mut. Auto. Ins. Co. v. Shaffer, 888 S.W.2d 146, 147 (Tex.App.-Houston [1st Dist.] 1994, pet. denied) (emphasis in original).
Here, an analysis of the factors described in Shaffer leads us to the opposite result. First, we note that Daimler does not dispute that the terms of the agreement provide coverage for punitive damages; Daimler's challenge is only that coverage is against public policy. Therefore, unlike Shaffer, where the terms were determined to be ambiguous, here, the terms of the insurance policy undisputedly provide for coverage. Id. at 148-49. Second, also unlike Shaffer, which involved a statute that required coverage for uninsured motorists, here no statute requires coverage for the types of claims filed. Id. at 149. Rather, the decision to enter into the insurance contract was a private matter between Daimler and Greenspoint conducted through an arm's-length transaction that was not governed by any statutory requirement that the insurance company provide coverage for the type of claim. See id. Nothing in the first two factors would point towards disallowing the agreement for coverage.
The insurance policies at issue provide coverage for the "sums" or "all sums" that the insured becomes legally obligated to pay. The policies do not limit this language and provide no exclusion for exemplary damages. The broadened garage endorsement states Daimler "will pay all sums the insured legally must pay as damages. . . ." The CGL policy states that Daimler "will pay those sums that the insured becomes legally obligated to pay as damages. . . ." The umbrella policy states that Daimler will pay "the total amount of damages for which the insured is legally liable. . . ." No exclusion specifically mentions punitive damages. Thus, an ordinary person examining the plain language of the policy would reasonably expect that "all sums" includes punitive damages. See Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203, 213-14 (Tex.App.-Houston [1st Dist.] 2003, pet. denied) (party's reasonable expectation of coverage based on meaning ordinary person would give to policy language); see also Am. Home Assurance Co. v. Safway Steel Prods. Co., 743 S.W.2d 693, 702 (Tex.App.-Austin 1988, writ denied) (holding that phrase "all sums which the insured shall become legally obligated to pay as damages" included punitive damages).
We are left with the third factor, which is the most significant to our resolution because we must determine whether allowing the insurance coverage would serve the purpose of punishing the wrongdoer through the exemplary award. See id. Here, the wrongdoers are the employees who held management positions at Greenspoint who committed the misconduct. Those employees are not before us in this appeal. Greenspoint's liability for the exemplary damages is the result of the finding that the employees were the vice-principals of the corporation and therefore their actions were the actions of the corporation. Although we recognize that the actions of vice-principals are considered the acts of the corporation, it is undisputed that Greenspoint's CEO, officers, and shareholders did not know about or participate in the wrongful conduct. Making Greenspoint itself responsible for payment of the exemplary damages punishes Greenspoint's CEO, officers, and shareholders for conduct that they undisputedly did not participate in or know about, due to errant behavior by employees in management positions. Further, we cannot conclude that making Greenspoint itself responsible for payment of the exemplary damages will deter in any way Greenspoint's CEO, officers, and shareholders from committing wrongful conduct because they undisputedly did not participate in or know about the errant behavior by employees in management positions. Under these circumstances, the policy objectives of punishing and deterring the wrongdoer are not served by disallowing the insurance coverage. See id. at 149. Considering the public policies of Texas, Greenspoint is entitled to the insurance coverage it purchased for indemnification of the exemplary damages. See id.
C. The Powell decision Does Not Compel Denial of All Insurance Coverage
Daimler cites to Hartford Casualty Insurance Co. v. Powell, 19 F. Supp. 2d 678 (N.D. Tex. 1998). In Powell, a federal district court suggests that, if the Texas Supreme Court were to decide this issue, it would hold that indemnification of an exemplary damages award would violate Texas public policy designed to punish wrongdoers with exemplary damages. Powell, 19 F. Supp. 2d at 696; but see Phila. Indem. Ins. Co. v. Stebbins Five Cos., No. Civ. A. 3:02-CV-1279-M, 2004 WL 210636, at *6 (N.D. Tex. Jan. 27, 2004) (holding that CGL policy that covered "all sums" included punitive damages and Texas public policy did not preclude coverage for punitive damages).
Hartford issued an insurance policy to Powell's employer. Powell, 19 F. Supp. 2d at 680. Powell, while intoxicated, drove a vehicle covered by the policy colliding with Gann, who sought actual and punitive damages. Id. Hartford filed suit seeking a declaration that it had "no liability under the policy for any punitive damages that might be awarded Gann against Powell." Id. The court conducted a review of the cases from Texas courts of appeals as well as cases from other jurisdictions before concluding,
The coverage at issue in Powell stated,
We will pay all sums an "insured" legally must pay as damages because of "bodily injury" or "property damage" to which this insurance applies, caused by an "accident" and resulting from the ownership, maintenance or use of a covered "auto."
Hartford Cas. Ins. Co. v. Powell, 19 F. Supp. 2d 678, 680 (N.D. Tex. 1998).
[T]he Texas Supreme Court would, if presented with the facts of this case, hold that the public policy of Texas would be offended if the coverage of the policy were to protect Powell from a punitive damage award recovered by Gann against Powell, and that, therefore, to whatever extent the coverage of the policy would literally extend to Gann's claim for punitive damages, the coverage is void and unenforceable under Texas law.
Id. at 696. The court also specifically stated that the public policy in favor of punishing wrongdoers "overcomes any competing policy that a contract entered into freely and voluntarily shall be enforced." Id. at 694.
The policy considerations directly before the court in Powell, like Shaffer, are the "strong public policy reasons for not allowing socially irresponsible drivers to escape the element of personal punishment in punitive damages when they are guilty of reckless manslaughter or maiming on the highway." Id. at 685. In the context of automobile insurance policies, another concern was that "considering the extent to which the public is insured, the burden would ultimately come to rest not on the insurance companies but on the public, since he added liability to the insurance companies would be passed along to the premium payers." Id. Allowing the insurance would mean that "[s]ociety would then be punishing itself for the wrong committed by the insured." Id.
The policy concerns presented in Powell are not present under the narrow circumstances here, where liability on Greenspoint is the result of conduct by vice-principals, of which the CEO, officers, and shareholders did not take part in or know about, and where the agreement is reached between an insurance company and a corporation, entities capable of bargaining for terms for the premiums for the insurance policy.
Although the court in Powell seems to broadly suggest that no insurance for exemplary damages is allowed, it acknowledges that there are times that such insurance may not violate public policy. Powell states,
Thus, the court is confident that a Texas court would look to Michael A. Rosenhouse, Annotation, Liability insurance coverage as extending to liability for punitive or exemplary damages, 16 A.L.R.4th 11, 1982 WL 198924 (1982), as being authoritative in this case. Rosenhouse notes, "By far the vast majority of these cases [discussing public policy] have reached results consistent with the proposition that it is contrary to public policy to insure oneself against liability for an award of punitive damages, based on one's own conduct, except as to instances in which the conduct on which the award is based is virtually indistinguishable from the conduct which comprises the underlying wrong.
Id. at 691 (emphasis added). The court in Powell also recognizes that the "cases holding that public policy allows punitive damages to be covered by insurance do so in a limited number of settings." Id. at 692. One setting in which coverage of punitive damages is allowed is when the insured is vicariously liable for punitive damages. See id. (citing S. Farm Bureau Cas. Ins. Co. v. Daniel, 246 Ark. 849, 440 S.W.2d 582 (1969), Cont'l Ins. Cos. v. Hanckock 507 S.W.2d 146 (Ky. 1973), and First Nat'l Bank of St. Mary's v. Fidelity Deposit Co., 283 Md. 228, 389 A.2d 359 (1978)); see also Michael A. Rosenhouse, Annotation, Liability insurance coverage as extending to liability for punitive or exemplary damages, 16 A.L.R.4th 11, 25 (1982) (noting that even among states that have held public policy prohibits insurance coverage of punitive damages "several have held or recognized that an exception to the rule exists, and thus coverage of punitive damages is permissible, where the party seeking the benefit of the insurance has been held liable for punitive damages solely due to the conduct of another").
We express no opinion on whether, as a general rule, Texas policy disallows a party from insuring for exemplary damages. See Powell, 19 F.Supp.2d at 692. Our holding today is limited to the narrow circumstances before us, where a corporation is held liable for conduct by vice-principals; the conduct was done without the participation or knowledge of the CEO, officers or shareholders of the corporation; and the contract at issue covers "all sums" and is an arm's-length transaction between an insurance company and a corporation that distinguishes between conduct done by employees and conduct done by the corporate entity, its CEO, its shareholders, and its officers. Thus, we cannot conclude that allowing the insurance coverage under these limited circumstances violates public policy to punish the wrongdoer.
We are only required to follow precedent from the Texas and United States supreme courts. See Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex. 1993).
Viewing the underlying facts concerning this agreement, we also cannot conclude that this agreement is contrary to the public good. See Wright, 173 S.W.3d at 551. Rather, the agreement here serves the public good because Greenspoint, its CEO, its officers, and its shareholders did not commit the wrongful acts and should be allowed to have their insurance policy, for which they paid, indemnify them for the punitive damages, which were assessed against the corporation only due to conduct, of which its CEO, officers, and shareholders were not aware, done by its employees who held management positions. We hold that the agreement does not violate public policy. See Lawrence, 44 S.W.3d at 553.
There is no controlling authority directly on point. The issue of indemnification of punitive damages has been raised in two cases pending before the supreme court. See Fairfield Ins. Co. v. Stephens Martin Paving, L.P., 381 F.3d 435, 436 (5th Cir. 2004) (per curiam) (petition for certified question accepted, Aug. 27, 2004); Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172, 183 (Tex.App.-Fort Worth 2004, pet. filed) (briefing on the merits requested June 6, 2005).
We overrule Daimler's issue four.
Conclusion
We affirm the judgment of the trial court.
Having overruled Daimler's issues one, two, and three concerning Greenspoint's breach of contract claim, we need not reach Daimler's issues five, six, and seven concerning the extra-contractual claims, because the trial court made a judgment in favor of Greenspoint based on the extra-contractual claims conditional upon the reversal of the breach of contract claims.