Case: 09-10734 Document: 00511217237 Page: 1 Date Filed: 08/27/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 27, 2010
No. 09-10734
Lyle W. Cayce
Clerk
DARRELL D. MINTER, As Receiver,
Plaintiff-Appellee
Cross-Appellant,
v.
GREAT AMERICAN INSURANCE COMPANY OF NEW YORK,
formerly known as American National Fire Insurance Company,
Defendant-Appellant
Cross-Appellee
Appeals from the United States District Court
for the Northern District of Texas
No. 3:02-CV-2040
Before DAVIS, SMITH, and HAYNES, Circuit Judges.
HAYNES, Circuit Judge:*
The district court held that a policy issued by Great American Insurance
Company of New York (“Great American”) includes coverage for a exemplary-
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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damage award in a state tort action. Great American appeals the portion of the
judgment ordering it to pay exemplary damages, arguing that such coverage
violates Texas public policy. The receiver for the state-court plaintiff cross-
appeals, urging that the district court offset the judgment by too great an
amount based on a partial settlement agreement.
We conclude that coverage of the exemplary-damage award in this case
violates Texas public policy and that the district court correctly calculated the
offset. We therefore REVERSE IN PART, AFFIRM IN PART, and REMAND for
recalculation of the judgment.
I.
In 1996, Jerry Largent, a truck driver for JTM Materials (“JTM”), pulled
out of a private driveway in a tractor-trailer owned by Hammer Trucking
Company (“Hammer”) on lease to JTM. The trailer was struck by a vehicle
driven by Grant Morris. Both drivers were intoxicated. Morris was injured.
JTM had a primary truckers insurance policy with St. Paul Fire & Marine
Insurance Company (“St. Paul”) for up to $1 million and an excess umbrella
policy with Great American for coverage over the $1 million primary policy, up
to $25 million (“the umbrella policy”).
Morris sued Largent, Hammer, and JTM in Texas state court. Before
trial, JTM was granted summary judgment. During trial, testimony was elicited
that showed that Largent, who pled guilty to DWI in connection with this
accident, had two prior convictions for DWI (in 1980 and 1994). Largent
admitted that, at the time of the accident, (1) he was intoxicated; (2) he realized
that he was a danger “to the folks on the highway having drove [sic] an 18-
wheeler while [he was] intoxicated;” and (3) he “knew it was possible” that
“someone might get hurt because [he was] intoxicated and driving a truck.” A
jury awarded $2,633,170 in actual damages, plus exemplary damages of
$1,650,000 against Largent and $300,000 against Hammer.
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Following trial, Morris filed an action to appoint Darrel Minter as receiver
to collect insurance benefits owed to cover the judgment against Largent. The
receiver settled with St. Paul for $1.9 million (“the St. Paul settlement”),
releasing Hammer, JTM, and St. Paul from all claims.
Shortly thereafter, the receiver filed this federal suit against Great
American for recovery of the remainder of the insured judgment claims. The
district court granted summary judgment to Great American, finding that
Largent was not an “insured” under Great American’s policy with JTM. We
reversed in part and remanded for trial on the issue of whether Largent was an
insured under the umbrella policy because he was a “permissive user” of the
truck. Minter v. Great Am. Ins. Co., 423 F.3d 460 (5th Cir. 2005).
At trial, the jury found Largent was a permissive user under Great
American’s policy making him an insured under the policy. The court issued a
judgment of $8,160,342.29, representing the value of the state court judgment
against Largent, plus interest, offset by $1.9 million, the amount of the St. Paul
settlement.
Great American filed a motion for new trial or to amend the judgment on
the ground that exemplary damages were not covered by the umbrella policy,
and also seeking clarification of the post-judgment interest award. The court
denied the motion for a new trial, holding, inter alia, that Texas public policy
does not prohibit insurance coverage of exemplary damages in this case. The
district court concluded that the “ongoing, systemic, extreme circumstances” it
deemed necessary to avoid indemnity of exemplary damages were not present.
The court also awarded costs and attorneys fees to the receiver.
Great American appeals only that portion of the judgment holding that the
exemplary damages awarded against Largent are insurable under Texas public
policy. The receiver cross-appeals, arguing that the terms of the St. Paul
settlement required the court offset the judgment by only $1 millionSSthe
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amount of coverage under the St. Paul policy—not the full $1.9 million paid by
St. Paul.
II.
Whether Texas public policy permits Great American to indemnify
Largent for the state exemplary damages award is a question of state law.
Therefore, we review that issue de novo. Gen. Universal Sys., Inc. v. Lee, 379
F.3d 131, 149 (5th Cir. 2004).
A.
In Texas there is a two-step process for determining whether a exemplary-
damage claim is insurable:
First, we decide whether the plain language of the policy covers the
exemplary damages sought in the underlying suit against the
insured.
Second, if we conclude that the policy provides coverage, we
determine whether the public policy of Texas allows or prohibits
coverage in the circumstances of the underlying suit. We look first
to express statutory provisions regarding the insurability of
exemplary damages to determine whether the Legislature has made
a policy decision. If the Legislature has not made an explicit policy
decision, we then consider the general public policies of Texas.
Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 655 (Tex.
2008) (citations omitted). Great American concedes that the plain language of
the umbrella policy allows for coverage of exemplary damages. Neither party
argues that the Texas Legislature has made an explicit policy decision relevant
to this case. What remains then, is to “consider the general public policies of
Texas.” Id. Great American urges us to adopt a rule that indemnity for
exemplary damages awards against individuals always violates public policy.
Minter urges us to adopt the district court’s reasoning.
It is unnecessary to announce a broad rule in order to decide this case.
The application of Fairfield in this case is straightforward. This accident
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represented Largent’s third DWI conviction. Largent, then, was a repeat
offender who clearly has not learned his lesson. By his own admission, he knew
he was a “danger to the folks on the highway” driving around drunk in an 18-
wheeler and that it was “possible someone might get hurt.” Under the facts of
this case, Texas public policy prohibits Great American from indemnifying the
exemplary damages award here. Any exemplary damages must therefore be
recovered from Largent himself and not from Great American.
III.
We turn to the receiver’s cross-appeal. The district court offset the
judgment by $1.9 million, the full amount of the St. Paul settlement. The
receiver contends that was error because the settlement agreement required the
court to offset the judgment by only $1 million, the value of the St. Paul primary
policy. Thus, the receiver argues, the judgment should be increased by $900,000.
We disagree. The district court properly applied the plain language of the
settlement agreement in offsetting by the full $1.9 million.
The receiver points to two portions of the settlement agreement.
Paragraph 3 states, “It is expressly understood that this partial release of the
Judgment does not in any way release . . . any obligation of Largent to pay any
portion of the Judgment in excess of the St. Paul policy limits.” (emphasis
added). Likewise, ¶9 states, “In return for . . . $1,900,000 paid by St. Paul . . .
Morris . . . does hereby partially credit and release Largent from the legal
liability and responsibility to pay the Judgment to the extent of the St. Paul
policy limits only.” (emphasis added). The receiver points out that the limit of
the St. Paul policy is $1 million and that the settlement expressly releases
Largent from liability only up to the value of that policy.
The receiver is correct as far as the amount of release is concerned. The
amount of release contemplated by the settlement, however, is different from the
amount of money actually paid toward the judgment. In an artfully-drafted
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settlement agreement, those amounts would probably be identical. But ¶13
provides,
All parties . . . contemplate that all the payments made to Morris
and Minter pursuant to this Agreement are for damages received on
account of personal physical injuries or physical sickness within the
meaning of Section 104(a)(2) and Section 130 of the Internal
Revenue Code . . ., and no portion of those amounts represent
punitive or exemplary damages.
(emphasis added). A plain reading of the settlement indicates that although the
receiver and Morris released Largent for only $1 million, Largent (via St. Paul)
actually paid $1.9 million for compensatory damages in the judgment. Offsetting
by only $1 million would allow the receiver a windfall double recovery of
$900,000 not authorized by the settlement. The district court, therefore,
properly offset the judgment by the full $1.9 million.
The receiver argues that double recovery of the $900,000 surplus would
not constitute a windfall, because St. Paul did not pay the surplus toward
compensatory damages awarded in the state court judgment. Rather, the
receiver contends, the $900,000 constitutes a preemptive settlement of “bad
faith” damages that St. Paul would have had to paySSindependently of its
insurance contract obligationsSSin some future lawsuit against the company.
The receiver does not point to any language in the settlement agreement
supporting that characterization of the $900,000. Moreover, his position is
directly contradicted by ¶13, which provides that the entire $1.9 million is
payment for compensatory damages.
IV.
In summary, to the extent that Great American’s umbrella policy
indemnifies Largent for exemplary damages, it violates Texas public policy
under the facts of this case. The district court properly offset the judgment by
$1.9 million. Accordingly, we AFFIRM IN PART, REVERSE IN PART, and
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REMAND for recalculation of the judgment.1
1
The receiver’s motions to strike portions of the record and briefs are DENIED.
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