While states possess discretion over the imposition of punitive damages, it is well established that there are procedural and substantive constitutional limitations on these awards. The Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor. The reason is that elementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a state may impose. To the extent an award is grossly excessive, it furthers no legitimate purpose and constitutes an arbitrary deprivation of property.
An insured, when driving with his wife was involved in a multivehicle accident which was fatal to one of the other drivers. During the ensuing accident litigation, the other parties offered to settle their claims for the $50,000 amount of the insured's policy limits, but the insured's automobile insurer rejected the offer. Eventually, a jury determined that the insured had been 100 percent at fault and a judgment was returned for about $185,000. After the insured was unsuccessful on direct appeal of the judgment, the insurer paid the entire amount of the judgment, including the excess over the policy limits. However, there was also some evidence that allegedly: (1) the insurer's employees had supposedly altered their records to make the insured appear less culpable for the accident; (2) the insurer, in refusing the settlement offer, had disregarded the overwhelming likelihood of liability and the near certainty that, by taking the case to trial, a judgment in excess of the insured's policy limits would be awarded with respect to the accident; and (3) the insurer had (a) at first assured the insured and his wife that their assets would be safe from any accident-related verdict, and (b) later told the insured and his wife, postjudgment, to put a for-sale sign on their house. Thus, the insured filed a bad faith action against the insurer for fraud and intentional infliction of emotional distress, as well as compensatory and punitive damages. The The jury awarded the insured $2.6-million in compensatory damages and $145-million in punitive damages, which the trial court reduced to $1 million and $25 million respectively. Both parties appealed. The insured contended that the substantial punitive damages award was justified in view of the insurer's national scheme to meet corporate fiscal goals by capping claim payments and engaging in fraudulent practices. The insurer argued that the ratio of punitive damages to compensatory damages clearly indicated that the punitive damages award was excessive and unrelated to the actual harm suffered by the insureds.
Whether the award of $145-million as discretionary punitive damages, where full compensatory damages are $1-million, is excessive and in violation of the Due Process Clause of the Fourteenth Amendment?
The United States Supreme Court held that the punitive damages award was neither reasonable nor proportionate to the wrong committed, and it was thus an irrational, arbitrary, and unconstitutional deprivation of the property of the insurer. While the insurer's nationwide policies were clearly deficient, evidence of dissimilar and out-of-state misconduct of the insurer, and out-of-state conduct which was lawful where it occurred, was an improper basis for punishing the insurer for the limited harm to the insureds. Further, neither the wealth of the insurer nor the fact that its nationwide misconduct went largely unpunished justified punitive damages which were grossly disproportionate to the compensatory damages awarded for the actual harm to the insureds.