A Policyholder's Paradise Lost? An Insured's Perspective on the Insurability of Punitive Damages

February 01, 2001

There is no hotter issue for coverage attorneys, no hotter potato for Texas courts, than whether Texas law does or does not allow insurance coverage for punitive damages. The Texas Supreme Court has never addressed the issue. Texas appellate courts have gone both ways. But the current commotion on this topic was singlehandedly caused by an Erie guess from the Northern District of Texas: Hartford Casualty Insurance Company v. Powell, 19 F. Supp. 2d 678 (N.D. Tex. 1998).
In Powell, Judge John McBryde delivered a comprehensive argument that Texas public policy prohibits coverage for punitive damages—at least, as discussed below, under some circumstances. Carriers immediately championed the Powell opinion as the death knell of coverage for wayward policyholders. But policyholders, recovering from the initial blow, have begun to ask questions. Is the Powell opinion really as far-reaching as carriers say it is? And, to the extent that it is, should Texas courts follow it?  Policyholders have answered “no” to both questions. Understanding why they reach this conclusion requires a closer look at the Powell opinion itself.
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