Mid-Atlantic Health Law TOPICS

Hero Image for page

Supreme Court Limits Punitive Damage Awards

Doctors are suing health insurers and HMOs in regard to alleged improper payment
practices, and such suits often seek the recovery of punitive damages in addition to
compensatory damages. Compensatory damages are intended to compensate a party for
harms incurred, while punitive damages are intended to "punish" the alleged wrongdoer.
The U.S. Supreme Court recently determined that giving juries unfettered discretion to
set punitive damages awards constitutes a violation of the U.S. Constitution by taking
property without due process of law. More specifically, in State Farm Mutual Automobile
Insurance Company v. Campbell, the Court overturned a $145 million punitive damages
award against an automobile insurance company that had improperly handled a personal
injury claim brought against its insured.
In so doing, the Court stated that in most cases punitive damage awards that are ten times
the size of compensatory damage awards will violate due process requirements.
Moreover, in cases in which substantial compensatory damages are awarded, punitive
damages awards that are more than the compensatory damages may be constitutionally
suspect. The State Farm case also imposes important new limits on the evidence that may
be considered in awarding punitive damages.
A.  Background 
Curtis Campbell was involved in an automobile accident in Utah in which one motorist
was killed and another was seriously injured. Campbell was insured by State Farm, and
State Farm's own investigator concluded that Campbell would likely be found
responsible for the accident.
Nevertheless, State Farm declined offers to settle the claims for $25,000 apiece, which
was the liability limit under the policy. In addition, State Farm told Campbell and his
wife that they did not need to retain separate counsel.
When a Utah jury returned a judgment against Campbell for $185,849, State Farm
initially refused to cover the portion of the judgment in excess of its liability limits,
refused to post a bond to allow Campbell to appeal the judgment against him, and told the
Campbells that they "may want to put for sale signs" on their property.
The Campbells sued State Farm for bad faith, fraud, and intentional infliction of
emotional distress. At trial, the jury determined that State Farm's decision not to settle the
claims against Campbell was unreasonable because there had been a substantial
likelihood of a verdict in excess of the insurance policy.
The Campbells also introduced evidence that State Farm's decision to take the case to
trial was part of a national scheme to meet corporate goals by capping payouts on claims.
The jury awarded the Campbells $2.6 million in compensatory damages, which was
reduced by the trial court to $1 million, and $145 million in punitive damages.
B.  BMW v. Gore 
In reviewing the punitive damages award, the Supreme Court relied on its previous
decision in BMW of North America, Inc. v. Gore. In Gore, the Court said that three
guideposts should be considered when reviewing punitive damages:  (1) the degree of
reprehensibility of the defendant's conduct; (2) the disparity between the actual or
potential harm suffered by the plaintiff and the punitive damages award; and (3) the
difference between the punitive damages awarded and the civil penalties authorized in
comparable cases.
In considering the reprehensibility of a defendant's conduct, the Court found that a more
modest punishment for State Farm's
reprehensible conduct should have been imposed.
With respect to the second Gore guidepost, the ratio between the harm to the plaintiff
and the punitive damages award, the Court concluded that a punitive damages award that
was 145 times the size of the compensatory damages award offended due process.
Although the Court expressly declined to impose a bright line ratio that a punitive
damages award cannot exceed, the Court declared that few awards exceeding nine to one
will satisfy due process. Moreover, when compensatory damages are substantial, the
Court stated that a lesser ratio, perhaps only equal to compensatory damages, should be
the outermost limit.
The Court also explained that misconduct that results only in economic harm will usually
support a smaller punitive damages award than conduct that causes physical injury.
The third Gore guidepost, the disparity between the punitive damages award and the civil
penalties authorized in comparable cases, also weighed against sustaining the award in
Campbell. The Court noted that Utah State law only imposes a $10,000 fine for an act of
fraud, an amount that was dwarfed by the $145 million punitive damages award.
The Supreme Court concluded that the punitive damages award against State Farm
should be at or near the amount of compensatory damages. Accordingly, the case was
sent back to the Utah Supreme Court to calculate the proper amount of punitive damages
under these principles.
C.  New Evidence Rules 
The Court in Campbell was especially critical of the trial court's decision to admit
evidence of State Farm's nationwide pattern of claims adjustment, much of which
conduct was dissimilar to that directed at the Campbells. In fact, the Court concluded that
the case had been used as a platform to expose and punish State Farm for its operations
throughout the country, rather than focusing on State Farm's mistreatment of the
Campbells. 
The Court also declared that a state may not, as a general rule, impose punitive damages
to punish a defendant for unlawful acts committed outside its jurisdiction. Otherwise a
defendant could be subjected to multiple punitive damage awards for the same
misconduct.
The Court also questioned the practice, permitted in most states, of allowing a jury to
consider the wealth of a defendant in determining the appropriate size of a punitive
damages award. Although the Court stopped short of stating that such evidence is never
proper, it nevertheless admonished that the wealth of a defendant cannot justify an
otherwise unconstitutional punitive damages award. The focus must remain on the
relationship between the size of the award and the harm suffered by the plaintiff.
D.  Conclusion 
The Campbell decision will narrow the scope of cases brought against insurance
companies to the specific alleged wrongdoing, as opposed to suspect practices generally.
Campbell will also likely prevent the astronomical punitive damages awards that have
been in the news lately. Nevertheless, even after Campbell, plaintiffs will still be able to
seek and to receive punitive damages in appropriate cases, albeit in lesser amounts.

Print

Date

12.23.03

Type

Publications

Authors

Rosen, Barry F.

Teams

Health Care