The Failure of Punitive Damages

   By Barry Zalma, Attorney and Consultant

The Reasons for Punitive Damages

Civil juries have a difficult enough time establishing appropriate numbers to indemnify a plaintiff so that he or she is back the way he or she was before the incident. To ask them to set an appropriate civil punishment without the protection given criminal defendants is asking too much. The wild differences in awards of punitive damages from a single dollar to billions of dollars is evidence of the difficulties punitive damages give juries.

Punitive damages are "private fines levied by civil juries." [Electrical Workers v. Foust, 442 U.S. 42, 48 (1979)] They are not awarded to compensate for injury, but rather to further the aims of the criminal law: "to punish reprehensible conduct and to deter its future occurrence." [Bankers Life & Casualty Co., 486 U.S. 71, 87 (1988) (O'Connor, J., concurring in part and concurring in judgment). See also Restatement (Second) of Torts § 908(1) (1979)]. They are a windfall to the plaintiff and a boon to the plaintiffs' lawyer. The role of punitive damages runs counter to the normal function of tort and contract remedies to put the plaintiff back in the condition he or she was in before the tort.

Precedents are legion with the recognition of the penal nature of punitive damages. [e.g. Tull v. United States, 481 U.S. 412, 422, and n. 7 (1987); Memphis Community School District v. Stachura, 477 U.S. 299, 306, n. 9 (1986); Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 260-261 (1984) (Blackmun, J., dissenting); Smith v. Wade, 461 U.S. 30, 59 (1983) (Rehnquist, J., dissenting); Newport v. Fact Concerts, Inc., 453 U.S. 247, 266-267 (1981); Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974); Rosenbloom v. Metromedia, Inc., 403 U.S. 29, 82 (1971) (Marshall, J., dissenting); Lake Shore & M. S. R. Co. v. Prentice, 147 U.S. 101, 107 (1893).]

The purposes of punitive damages are to punish the defendant and to deter future misconduct by making an example of the defendant.

"Punitive" damages - sometimes referred to as exemplary damages, vindictive damages, or smart money - exceed actual damages. Punitive damages are not generally thought to be solely or even mainly compensatory. Until well into the 19th century, punitive damages frequently operated to compensate for intangible injuries, compensation which was not otherwise available under the narrow conception of compensatory damages. This function reached its peak in the 1960′s and 1970′s when courts began to allow people to recover tort damages (including punitive damages) for breaches of insurance contracts. In so doing, the desire to compensate for intangible injuries as a result of the breach of insurance contracts, the courts created a major source of income for lawyers suing and defending insurers and increased litigation against insurers with hopes of hitting a jackpot with a punitive award.

When an American is damaged by the tortious conduct of another his or her ability to reason analytically disappears. The damaged person becomes angry and wants to punish the person who caused the harm. Indemnity, the general measure of tort or contract damages, is insufficient. The injured person wants revenge. The injured person wants the person who caused the injury to be punished.

The law of almost every state, either by statute or court decision, allow the injured person to punish the person who caused the injury and profit from that punishment. The stated purpose for the award of punitive damages is to deter the defendant and others from the wrongful conduct being punished not to allow the plaintiff to profit. Punitive damages seldom effect the stated purposes, other than punishment,  for which they were intended. Rather, their effect is to punish those who are not parties to the suit.

Who Profits From Punitive Damage Awards?

History has shown that massive punitive damage judgments that make headlines in the press are often reduced, reversed or sent back for retrial. The news of the judgments, however, effect all litigants with similar cases. The press seldom reports with the same vigor, if at all, the reversal of massive punitive damage awards. The damage to the insurance industry is done by the news of the verdict. Copies of the news stories are immediately delivered to insurer defendants with a settlement offer. They are told that a settlement will allow the insurer to avoid similar punishment. Insurers, fearing being painted with the same brush as that of their fellow defendants, no matter how strong their case, will settle. The innocent, therefore, pay money they do not owe. The insurer that acted in bad faith does not. It gets a new trial or a severely reduced verdict. Its bad acts, therefore, make it more competitive than the innocent insurer who is wrongly sued and convinced to settle because of the fear of a potential punitive damages award.

The plaintiff who recovers a punitive award is also punished because he pays 40% to 50% of the punitive damages to his or her lawyer on a contingency fee bases and 39% to the U.S. Government of the total award and if he lives in a state like New York or California with almost 10% income tax the plaintiff will receive almost none of the punitive damages awarded. [See post, Punitive Damages and Taxes Posted on April 7, 2011 by Barry Zalma].                

It is imperative that those who are potential defendants in a suit seeking punitive damages to understand its history and application across the country. Every corporation, whether they provide services like insurers and credit providers or manufacture goods are potential defendants. Every corporation with assets that a lawyer believes can fund a judgment or settlement is subject to a suit seeking punitive damages. This book will give the potential defendant and the potential plaintiff the information needed to successfully pursue or defend against a suit seeking punitive damages.

Potential litigation participants must understand that punitive damages are fixtures of US law that allows courts to assess punishment damages in excess of that needed to indemnify the plaintiff for his, her or its loss. The US Supreme Court has clearly stated that "[p]unitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition." [BMW of North America, Inc. v. Gore, 517 U. S. 559.] These damages often exceed the fines assessed by the state if the same person had acted criminally to damage the plaintiff.

The skills of plaintiff's trial lawyers have convinced juries to award damages in sums that exceed the annual budget of Greece. The jury assesses the enormous damages because it becomes inflamed by the wrongful conduct of the defendant and agrees with the lawyer's suggestion that the jury "teach the defendant a lesson" to stop it from doing the same to others. The argument has been successful in thousands of suits brought from Vermont to California and Florida to Washington.

For years punitive damage awards were unlimited. A $40 compensatory damage award resulted in a $5,000,000.00 verdict. Some juries assessed billions of dollars in punitive damages with no constraint from the courts other than the wealth of the defendant. In 2003 the US Supreme Court put limited punitive damages in the United States when in State Farm Mutual Automobile Insurance Co. v. Campbell, 123 S.Ct. 1513, 538 U.S. 408, 155 L.Ed.2d 585 (U.S. 04/07/2003) by a 6-3 vote, overturned a $145 million verdict against an insurer. The Supreme Court concluded that a punitive damages award of $145 million, where full compensatory damages were $1 million, is excessive and violates the Due Process Clause of the Fourteenth Amendment.

Justice Kennedy, writing for the majority limited the ability of state and federal courts to award huge punitive damages awards and concluded that it was improbable that a punitive damage award more than a single digit multiplier of the compensatory damages award would seldom, if ever, pass the due process test. The Supreme Court, in BMW of North America, Inc. v. Gore, 517 U. S. 559, set forth specific tests that must be met before punitive damages could fulfill the requirements of due process.

The State Farm Mutual Automobile Insurance Co. v. Campbell case arose out of an automobile accident where one party was killed and another severely injured. The Campbells, insured by State Farm attempted to pass six vehicles on a two lane highway, failed, and caused the driver of an oncoming car to drive off the road to escape collision with the Campbells' vehicle. The Campbells only had $25,000 coverage per person and $50,000 in the aggregate. The Campbells felt they were not at fault because there was no contact between the two vehicles. State Farm ignored the advice of its adjuster and counsel to accept policy limits demands and took the case to trial. The verdict at trial was more than $180,000 and the State Farm appointed counsel told the Campbells to put their house on the market since they would need the money to pay the verdict. State Farm refused to pay the judgment and to fund an appeal. The Campbells retained personal counsel to pursue an appeal that was not successful, entered into a settlement with the plaintiffs where the plaintiffs agreed to not execute on their judgment in exchange for an assignment of 90% of all money received in a bad faith action by the Campbells against State Farm. Before suit was filed, State Farm paid the full judgment.

At trial the plaintiffs brought in evidence of actions of State Farm in first party cases across the country, in third party cases not similar to the Campbells' auto accident and other evidence not related to the facts of their case.

The Supreme Court found that State Farm's "handling of the claims against the Campbells merits no praise," but concluded "a more modest punishment could have satisfied the State's legitimate objectives "instead, this case was used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country. However, a State cannot punish a defendant for conduct that may have been lawful where it occurred."

State Farm Mutual Automobile Insurance Co. v. Campbell created a major, precedent changing, limitation on the right of a jury to assess punitive damages settling limits on total amounts that can be assessed and the types of wrongful conduct a jury can consider. It did not eliminate punitive damages. They still exist to allow some lawyers to profit and to increase the tax revenues of the state and federal governments.

Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma, zalma@zalma.com and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.

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