Opinion
Civil Action No. 3:02-CV-1279-M
January 27, 2004
MEMORANDUM OPINION AND ORDER
Before the Court is the Motion for Summary Judgment of Philadelphia Indemnity Insurance Company ("Plaintiff), the Motion for Partial Summary Judgment and Contractual Indemnification of Defendants Stebbins Five Companies, Ltd., Stebbins Five Management, Ltd., and Stebbins Aviation, Inc. (collectively "Stebbins"), and the Motion for Summary Judgment of Defendants Guadalupe Rivera, Janie Lopez, and Santiago Fonseca (collectively "Rivera"). For the reasons stated herein, Plaintiff's Motion is DENIED and Stebbins's and Rivera's Motions are GRANTED.
BACKGROUND
Plaintiff issued an insurance policy ("the Policy") to the Stebbins Five Companies, covering the period from October 22, 1997 to October 22, 1998. The Policy lists in the Schedule of Named Insureds Stebbins Five Management and several long term care facilities, including Brentwood Place III ("Brentwood"). One of the Stebbins Five Companies, Stebbins Aviation, Inc., is a general partner of Brentwood.
The Policy has limits of $1,000,000 per occurrence and $3,000,000 in the aggregate. The Policy contains two separate insuring agreements, the Commercial General Liability ("CGL") agreement and the Long Term Care Facility Professional Liability ("Professional Liability") agreement.
The CGL agreement provides, in pertinent part:
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" . . . to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. . . .
b. This insurance applies to "bodily injury" . . . only if:
(i) The "bodily injury" . . . is caused by an "occurrence" . . .; and (ii) The "bodily injury" . . . occurs during the policy period.
c. Damages because of "bodily injury" include damages claimed by any person or organization for care, loss of services or death resulting at any time from the "bodily injury."
The Policy defines "bodily injury" as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time."
The Professional Liability agreement provides, in pertinent part:
A. Insuring Agreement
We will pay those sums that the insured becomes legally obligated to pay as damages because of "injury" to which this insurance applies. . . . This insurance applies only to "medical incidents" which occur during the policy period. The "injury" must be caused by a "medical incident." The "medical incident" must take place in the "coverage territory." We will have the right and duty to defend any "suit" seeking those damages.
"Injury" under the Professional Liability agreement is defined as "bodily injury, sickness or disease, including death resulting from any of these at any time." "Medical incident" under the Professional Liability agreement is defined as "any act or omission in the furnishing of Long Term Care services to any person. . . ."
On June 24, 1998, Martha Fonseca ("Fonseca") was admitted to Brentwood. Due to injuries sustained by Fonseca, their relative, during her stay at Brentwood, Rivera filed suit in Texas state court against Brentwood and Stebbins Aviation. In the state court suit, the plaintiffs alleged that negligence and abuse resulted in injury to Fonseca. The jury returned a verdict, finding that Brentwood's negligence caused injury to Fonseca, and also found that the injury resulted from Brentwood's malice, as defined in section 41.001(7)(b) of the TEX. Civ. PRAC. REM. CODE. The jury awarded the plaintiffs $100,000 in medical expenses, $200,000 for pain and suffering, and assessed $2,000,000 in punitive damages against Brentwood. In its judgment, entered on August 15, 2002, the state court reduced the punitive damages award to $366,510.58 and the medical expenses award to $83,255.29, but left the $200,000 pain and suffering award intact. The court determined that Rivera could recover actual and punitive damages jointly and severally from Brentwood and from Stebbins Aviation, as a general partner of Brentwood.
On September 1, 1995, the Exemplary Damages Act of the TEX. Civ. PRAC. REM. CODE became effective. It substituted malice for gross negligence as a prerequisite to punitive damages in a common law personal injury case. During the period applicable to this lawsuit, malice was defined as:
(A) a specific intent by the defendant to cause substantial injury to the claimant; or
(B) an act or omission:
(i) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and
(ii) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.
In the state court litigation, the jury was given an instruction only as to the second definition of malice.
On June 19, 2002, Plaintiff filed a declaratory judgment action in this Court seeking to have the Court declare that Plaintiff has no duty to indemnify Stebbins from punitive damages awarded in the underlying litigation. Stebbins then filed counterclaims, alleging breach of contract, breach of a common law Stowers duty, and violations of the Texas Insurance Code. On June 9, 2003, Plaintiff filed its Second Amended Complaint, joining Rivera, the plaintiffs in the underlying litigation, as defendants in the declaratory judgment action. As a judgment creditor of Stebbins and alleging themselves to be third party beneficiaries of the insurance contract, Rivera asserted a breach of contract counterclaim against Plaintiff.
In light of the Court's oral ruling on December 16, 2003, Stebbins has informed the Court of its intention not to pursue its Stowers and Texas Insurance Code claims.
The parties filed cross-motions for summary judgment. Plaintiff asks that the Court grant summary judgment in its favor on its declaratory judgment action and on Stebbins's and Rivera's counterclaims. Stebbins and Rivera request that the Court hold as a matter of law that the Policy requires Plaintiff to indemnify Stebbins from the punitive damages award, and that Plaintiff breached its insurance contract with Stebbins. Furthermore, Rivera asks that the Court hold as a matter of law that Rivera, as a judgment creditor, may recover the full amount of the judgment directly from Plaintiff.
STANDARD OF REVIEW
"`Summary judgment is appropriate only if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Tango Transp. v. Healthcare Fin. Servs. LLC. 322 F.3d 888, 890 (5th Cir. 2003) (quoting FED. R. Civ. P. 56(c)). In determining whether a genuine issue of fact exists, the court views the evidence in the light most favorable to the nonmovant. Halls v. Gillman, Inc., 81 F.3d 35, 36-37 (5th Cir. 1996). "In the language of the Rule, the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial. Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (internal citations, quotations, and emphasis omitted). Cases involving the interpretation of an insurance policy are particularly appropriate for summary disposition. Nat'l Am. Ins. Co. v. Columbia Packing Co., Inc., 2003 WL 21516586, at *2 (N.D. Tex. 2003) (Kaplan, M.J.) (citingPrincipal Health Care of La. v. Lewer Agency, Inc., 38 F.3d 240, 242 (5th Cir. 1994); SnyderGeneral Corp. v. Great Am. Ins. Co., 928 F. Supp. 674, 677 (N.D. Tex. 1996) (Kaplan, M.J.), aff'd, 133 F.3d 373 (5th Cir. 1998)). Under Texas law, an insured has the burden of demonstrating that coverage exists. Wallis v. United Servs. Auto. Ass'n, 2 S.W.3d 300, 303 (Tex.App.-San Antonio 1999, pet. denied). Once the insured demonstrates coverage, the burden shifts to the insurer to show that a policy exclusion nonetheless precludes coverage. Fairfield Ins. Co. v. Stephens Martin Paving, 2003 WL 22005877, at *8 (N.D. Tex. 2003) (Cummings, J.).
ANALYSIS
Under Texas law, the analysis of whether a policy of insurance permits the coverage of punitive damages is a two part-inquiry. First, it must be shown that the policy's terms provide for and do not exclude coverage of a punitive damages award. See Am. Home Assurance Co. v. Safway Steel Prods. Co., Inc., 743 S.W.2d 693, 701 (Tex.App.-Austin 1987, writ denied) Second, it must be shown that Texas public policy does not prohibit the coverage of a punitive damages award. See id. at 703.
A. Does the Policy Cover a Punitive Damages Award?
The Policy does not explicitly state that punitive damages are not covered under the CGL agreement or the Professional Liability agreements. The CGL agreement states that Plaintiff "will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury,'" and the Professional Liability agreement states that Plaintiff "will pay those sums that the insured becomes legally obligated to pay as damages because of `injury.'" The Policy also contains an exclusion for injuries that are expected or intended.
Plaintiff contends that the plain language of the Policy precludes coverage for punitive damages. Specifically, Plaintiff argues that punitive damages are not covered because they are not awarded "because of injury; rather, punitive damages are assessed as punishment for the aggravated conduct of the insured. Further, Plaintiff argues that the expected or intended injury exclusion precludes coverage for the punitive damages awarded against Brentwood.
Plaintiff's first contention is in error. Texas appellate courts have held that policy language almost identical to that contained in the Policy provides coverage for a punitive damages award. See Safway Steel Prods. Co., Inc., 743 S.W.2d at 702 (Tex.App.-Austin 1987, writ denied) (noting that "[t]he Texas courts that have interpreted the `all sums' phrase have held that the term encompasses punitive damages" and holding that policy providing coverage for "all sums which the insured shall become legally obligated to pay as damages because of . . . bodily injury . . ." covered punitive damages award); Dairyland Cty Mut. Ins. Co. v. Wallgren, 477 S.W.2d 341 (Tex.App.-Fort Worth 1972, writ ref'd n.r.e.). As these appellate court cases confirm, the language used in the Policy does not provide coverage only for compensatory damages. Furthermore, the Policy language mentions only damages and does not distinguish between compensatory and punitive damages. An insured reading the Policy would logically conclude it includes coverage for punitive damages. Accordingly, the Court finds that the CGL agreement and the Professional Liability agreement unambiguously provide coverage for an award of punitive damages, unless otherwise excluded.
Because Stebbins has made a claim that is covered under the language of the Policy, the burden shifts to Plaintiff to prove that an exclusion applies. Stephens Martin Paving. 2003 WL 22005877, at *8. The Court must adopt the construction of the exclusion proffered by the insured, as long as the construction is reasonable. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 666 (Tex. 1987).
Plaintiff argues that by finding malice, the jury determined that Brentwood acted (or did not act) in the face of an extreme risk of injury to Fonseca while being subjectively aware of the risk. Plaintiff claims that Fonseca's injuries were thus expected or intended. However, the Court finds this argument to be without merit. The statutory definition of malice applied at trial is identical to the definition of gross negligence under Texas law. See Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994). While the Texas Supreme Court has not addressed the issue, Texas appellate courts have stated that an expected or intended injury exclusion in an insurance policy does not exclude coverage for grossly negligent conduct. See, e.g., Safway Steel Products Co., Inc., 743 S.W.2d at 701 n. 8 ("We refuse to extend the `intentional injury exclusion' to include conduct amounting to gross negligence."). In addition, in Westchester Fire Insurance Co. v. Admiral Insurance Co., 2003 WL 21475423 (Tex.App.-Fort Worth 2003, n.w.h.), the Fort Worth Court of Appeals held that an insurance policy that stated it provided coverage only for injuries that were "neither expected nor intended" by the insured nonetheless provided coverage for injuries resulting from grossly negligent conduct. Id. at * 10.
The Court agrees with the analysis of the courts in Safway Steel Products Co., Inc. and Westchester Fire Insurance Co. and thus holds that the expected or intended exclusion does not preclude coverage of damages arising from grossly negligent conduct. Therefore, injuries arising from Brentwood's conduct are not excluded from coverage under the Policy.
B. Does Texas Public Policy Nonetheless Prohibit Coverage of a Punitive Damages Award?
Because the Court finds that the Policy provides coverage for punitive damages, the Court must next consider whether Texas public policy nonetheless prohibits coverage. See Stephens Martin Paving. 2003 WL 22005877, at *8. There are no Texas Supreme Court decisions directly addressing whether an insurer may indemnify an insured from an award of punitive damages, so this Court must make an Erie guess based on how it believes the Texas Supreme Court would likely decide the issue. See Nautilus Ins. Co. v. Zamora, 114 F.3d 536, 538 (5th Cir. 1997). If the Fifth Circuit has already determined the issue of state law to be applied in a diversity case, that decision is binding on this Court, unless a subsequent state court decision or statutory amendment renders the prior decision of the Fifth Circuit "clearly wrong." Batts v. Tow-Motor Forklift Co., 66 F.3d 743, 747 (5th Cir. 1995).
In Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026 (5th Cir. 1978), the Fifth Circuit determined that Texas public policy would not be offended by allowing a liability policy to cover a punitive damages award. Plaintiff contends that Ridgway is clearly wrong because insurance coverage for punitive damages would thwart the policy behind punitive damage awards — punishment and deterrence. See Moriel. 879 S.W.2d at 16-17. Plaintiff further contends that a series of Texas appellate court decisions holding that uninsured motorist policies do not provide coverage for punitive damages demonstrates a trend among Texas courts to hold that punitive damages are not insurable. See Milligan v. State Farm Mut. Auto Ins. Co., 940 S.W.2d 228 (Tex.App.-Houston [1st Dist] 1997, writ. denied); State Farm Mut. Auto Ins. Co. v. Schaffer. 888 S.W.2d 146 (Tex.App.-Houston [1st Dist.] 1994, writ denied); Vanderlinden v. United Servs. Auto Ass'n Prop. Cas. Ins. Co., 885 S.W.2d 239 (Tex.App.-Texarkana 1994, writ denied).
Plaintiff's contentions are in error. First, punishment and deterrence may nonetheless be promoted where coverage of punitive damages is permitted. Where an insurer contracts to provide coverage for a punitive damages award, the insurer may punish and deter a potential insured's conduct by raising its premiums or refusing coverage altogether. Second, the uninsured motorist context is distinguishable from other instances involving the coverage of punitive damages. Under Texas law, uninsured motorist insurance is mandated by law, so the insurer does not have the opportunity to bargain for a price. See Milligan, 940 S.W.2d at 232. Furthermore, punishment and deterrence against the wrongdoer are not achieved because the injured party's insurance-not the wrongdoer's-provides coverage. See Westchester Fire Ins., 2003 WL 21475423, at *9 (citing Milligan, 940 S.W.2d at 232; Shaffer, 888 S.W.2d at 149; Vanderlinden, 885 S.W.2d at 242). Thus, the Court finds unpersuasive Plaintiff's arguments regarding punishment and deterrence and the coverage of punitive damages in the uninsured motorist context.
The Court, therefore, does not believe that Ridgway has been rendered clearly wrong. Neither judicial opinions nor statutory amendments have substantially altered the legal landscape that existed when Ridgway was decided. Judge Cummings reached the same conclusion in Stephens Martin Paving, when he held that public policy was not violated by permitting one to insure against a punitive damages award. 2003 WL 22005877, at *9. In so holding, Judge Cummings noted that neither the Texas legislature nor the Texas Supreme Court had spoken to the issue and that no Fifth Circuit case had overruled Ridgway. Stephens Martin Paving. 2003 WL 22005877, at *9.Ridgway's continued vitality is further bolstered by Westchester Fire Insurance. In Westchester Fire Insurance, the Fort Worth Court of Appeals, addressing a scenario almost identical to the one before this Court, stated, "In the absence of any clear indication from either the legislature or the supreme court on this issue, we decline to hold that insurance coverage for punitive damages . . . violates the public policy of the State of Texas." 2003 WL 21475423, at *10.
Moreover, this Court finds that to the extent the Texas legislature has spoken to the issue, it has determined that insuring a for-profit nursing home against a punitive damages award does not violate public policy. Texas Insurance Code article 5.15-1 section 8 prohibits insurers from issuing professional liability policies to health care providers and physicians that provide coverage for punitive damages awards. However, when the Policy was purchased in 1998, for-profit nursing homes were exempt from section 8. In 2001, the Texas legislature amended section 8 to include for-profit nursing homes, but to continue to permit them to obtain coverage for punitive damages as long as the Insurance Commissioner approves an endorsement form permitting such coverage.
Based on both the original and amended section 8, the Texas legislature has clarified that it does not consider insurance coverage for punitive damages awarded against for-profit nursing homes to violate Texas public policy. The legislature must have intended the amendment to section 8 to have some effect.
Accordingly, because Ridgway is not clearly wrong, the Court is bound by it, and holds that Texas public policy does not prohibit coverage of a punitive damages award in a liability policy issued to a for-profit nursing home.
Because the Policy language provides for coverage and because Texas public policy does not preclude coverage, the Court holds that Stebbins is entitled to indemnification by Plaintiff from the punitive damages award assessed against it in the underlying litigation.
C. Is Rivera Entitled to Recover the Judgment Directly From Plaintiff?
Rivera contends that the Policy's "no action" clause permits Rivera, as a judgment creditor, to recover the amount of the judgment awarded in the underlying litigation directly from Plaintiff. Plaintiff does not challenge Rivera's contention.
The Policy contains two identical no action clauses, one for the CGL agreement and one for the Professional Liability agreement, that provide: "A person or organization may sue us to recover . . . on a final judgment against an insured obtained after an actual trial; but we will not be liable for damages that are not payable under the terms of this Coverage Part. . . ." Under Texas law, such clauses provide a judgment creditor with a right of direct action against the insurer to recover on the policy when the insured's liability has been established after a final judgment. See Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, 265 (Tex. 1969).
In this case, it is undisputed that Rivera is a judgment creditor of Brentwood and Stebbins Aviation, and that a final judgment has been entered against Brentwood and Stebbins Aviation. Therefore, because the Court has already held that the punitive damages award is payable under the Policy, the Court holds that Rivera may recover the judgment directly from Plaintiff.