Insurers See Hopeful Signs In High Court Punitive Damages Ruling
A U.S. Supreme Court decision last week that overturned a $145 million punitive damage award against State Farm could have implications for other litigation reform efforts, some observers say.
The decision in the case of State Farm v. Campbell held that a $145 million punitive damage award in a Utah case in which compensatory damages were assessed at $1 million was excessive and violated the Due Process Clause of the 14th Amendment.
In issuing its 6-3 opinion, the high court noted that the punitive damage award was calculated in part by presenting evidence of alleged misconduct by State Farm in other states, even though the insurers actions may have been legal in the states where they occurred.
However, the Supreme Court said, a state cannot punish a defendant for conduct that is legal where it occurred.
“A basic principle of federalism is that each state may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each state alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction,” the court said in a opinion written by Justice Anthony M. Kennedy.
Victoria Fimea, senior counsel for litigation with the Washington-based American Council of Life Insurers which filed an amicus brief in the case, said the court made a very important statement that could apply to the controversy over class-action litigation.
In many class actions, she said, plaintiffs obtain “outrageous” punitive damage awards by bringing in evidence of extra-territorial conduct that can be used to inflame the jurys emotions.
The decision in the State Farm case, Fimea said, can be looked to for proper guideposts on the award of punitive damages in class actions.
On the legislative front, where class-action procedural reforms are pending in Congress, she added, the decision helps demonstrate the need for reform.
In the State Farm case, the Bloomington, Ill.-based company was sued for alleged fraud and intentional infliction of emotional distress resulting from an auto insurance claim.
During the trial, the plaintiff was allowed to present evidence of a so-called “national scheme” on the part of State Farm to cap claims payments and meet corporate goals.
Partly on the basis of this evidence, the company was hit with a $145 million punitive damage judgment.
But the Supreme Court noted that most of State Farms practices, which occurred over a 20-year period, bore no relationship to the auto insurance claim at issue in the case.
Moreover, the court added, even the plaintiffs did not dispute the fact that much of the out-of-state conduct by State Farm was lawful where it occurred.
The court noted that in previous cases, it has outlined a three-part guidepost to determine the constitutionality of punitive damage awards.
The three factors are the degree of reprehensibility of the defendants conduct, the disparity between the harm and the award, and the difference between the award and criminal penalties imposed in comparable cases.
Regarding the first factor, the high court said the $145 million figure was based on out-of-state conduct that had no relationship to the claim at hand. Thus, the award violated the first part of the test.
As for the second part, the disparity between the award and the harm, the court noted that the punitive damage award was 145 times the amount awarded for compensatory damages.
The court said that while it did not want to establish a concrete limit on the ratio between the award and the harm, in practice a “single digit” ratio will satisfy due process.
The presumption against the constitutionality of a 145-to-1 ratio is “substantial,” the court said.
Finally, as to the third part of the guidepost, the court noted that the most relevant civil sanction under Utah law for an act of grand fraud is $10,000, which is dwarfed by the $145 million punitive damage award.
The court said that rather than $145 million, a punitive damage award at or near the compensatory figure of $1 million would likely be justified.
Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 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.