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Regulation and Compliance > State Regulation

Insurers Beware: Juries Being Turned Into National Insurance Regulators

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Trial by jury is an ideal thats as American as apple pie. However, a disturbing trend has emerged related to the role that juries play in deciding punitive damage awards–a trend that carries serious implications for insurers, and for our nations regulatory and legal systems in general.

A case now before the California Supreme Court recently caught the attention of the national news media because it raised the question of the competency and fairness of juries to determine punitive damages, as compared to judges.

But largely overlooked at the national level is a case before the U.S. Supreme Court. That case, State Farm v. Campbell, could have an immense impact on the law of punitive damages and the future of the U.S. insurance regulatory system.

In State Farm v. Campbell, the insurer declined to settle an auto accident claim for the policy limits. The case went to trial and resulted in an excess verdict. The insurer ultimately paid the full amount, but was still held liable for punitive damages far exceeding the compensatory damages.

In the punitive damages phase of the trial, the jury heard evidence of totally unrelated actions by the insurer as well as actions that occurred in other states governed by different laws. On appeal, the Utah Supreme Court upheld the verdict and judgment, and the U.S. Supreme Court has decided to review it.

The Utah jury was allowed to effectively punish the insurer for its practices in other states, including many practices that were legal in the other states. Four insurance trade groups have submitted a “friend-of-the-court” amicus brief in the case to the U.S. Supreme Court.

We contend that when a jury in one state imposes its view of insurance regulation on other states, it nullifies the insurance statutes and regulations that reflect the public policies and consumer protections that have been established for the citizens of those other states. This runs afoul of the Commerce, Due Process and Full Faith and Credit Clauses of the U.S. Constitution. It also undercuts one of the foundations of state regulation of insurance.

In determining punitive damages, the Utah court also allowed the jurors to hear evidence of dissimilar acts, such as underwriting practices when the underlying case involved a claim. In our amicus brief, the insurance groups argued that this violated prior holdings of the U.S. Supreme Court and had the jury passing judgment on practices for which it had neither evidence nor a clear understanding of the applicable law.

In the State Farm v. Campbell case, the Utah jury was allowed to install itself as a national insurance regulator. It did so even though jury members did not have the expertise and responsibility to achieve a balance among numerous public interests, as do real insurance regulators–such as protecting not only individual consumers, but also assuring solvency, availability and affordability.

This leads to the distinct possibility that future juries will overreact and impose such draconian punishment for an activity that it jeopardizes the solvency of otherwise responsible insurers, to the detriment of many other policyholders.

This kind of freelance insurance regulation across state lines erodes the credibility and value of state insurance regulation. In essence, a national insurance regulator has been created, but a regulator who lacks the balance and competing concerns of other regulators. The dangerous actions that can result not only interfere with the sovereignty of the other states, but also negatively impact the insurer and its customers.

That is not to suggest that there is no role for juries in such cases or that the jury is other than the best human fact-finding institution ever evolved. But it is clear that juries are best at resolving specific controversies for which they have heard and weighed admissible evidence in the context of clear legal standards.

The core problem in State Farm v. Campbell was not the jury, but was instead the failure to provide it a constitutionally defined role to play and clear legal rules about how to play it.

The insurers brief asks the U.S. Supreme Court to set the rules by, among other steps, barring the jury from hearing evidence of dissimilar actions and evidence of practices in areas beyond the jurisdiction of the jury.

In a paper presented to the National Association of Insurance Commissioners earlier this year, insurers urged a more proactive role by the NAIC in defending insurance regulation against this kind of unconstitutional and destructive incursion. In some cases, the NAIC has already filed its own briefs, pointing out the threat to the laws and regulations of other states in national class actions where a state court and jury imposes its view of good public policy on all other states.

We have urged that this issue become a higher priority with regulators because it constitutes a far greater threat to state insurance regulation than any federal legislative proposal. And even worse, from the standpoint of both the public and insurers, the jury as regulator lacks the tools and balance of a statutorily created insurance commissioner.

The NAIC is preparing its own White Paper on class actions in response to our request for action. We believe they must act now to assure the continuation of balanced and effective insurance regulation. Otherwise, in the absence of a positive U.S. Supreme Court decision in State Farm v. Campbell, alternatives to the current state insurance regulatory system will become far more justified and attractive.

is assistant general counsel at the American Insurance Association in Washington, D.C.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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