Punitive Damages Over 10:1 Violates Due Process

Punitive Damages Over 10:1 Violates Due Process

    By Barry Zalma, Attorney and Consultant

The fear of every insurer sued for the tort of bad faith is that the jury will run away from reason and punish the insurer in a manner violative of its rights of due process. As the U.S. Supreme Court stated in State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408 (State Farm) [enhanced version available to lexis.com subscribers], punitive damages should normally be limited to no more than a single digit multiplier of compensatory damages.

In Nickerson v. Stonebridge Life Insurance Co., B234271 (Cal.App. Dist.2 08/29/2013) [enhanced version available to lexis.com subscribers], applying the State Farm precedent and the California Supreme Court precedent in Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159 (Simon) [enhanced version available to lexis.com subscribers], was asked to deal with a punitive damage award the trial court found to be excessive.

The sole issue raised by both parties concerned the punitive damage award, specifically, whether the trial court’s remittitur of that award from $19 million to $350,000 based on a ratio of punitive to compensatory damages of 10:1 comports with due process. The trial court ruled that a policy provision limiting coverage was not conspicuous, plain, and clear and was therefore unenforceable, entitling Nickerson to $31,500 in additional benefits under the policy. A jury then found that Stonebridge had breached the implied covenant of good faith and fair dealing and awarded Nickerson $35,000 in compensatory damages for emotional distress. The jury found Stonebridge acted with fraud and fixed the punitive damage award at $19 million. The trial court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a reduction of the punitive damages to $350,000. Both parties appeal.

FACTUAL AND PROCEDURAL BACKGROUND

Stonebridge insured Nickerson under a policy (the policy) providing coverage for hospital confinement, intensive care unit confinement, and emergency room visits. Stonebridge agreed to pay indemnity in the amount of $350 per day for each day of confinement in a hospital for a covered injury, $350 per day for each day of confinement in a hospital intensive care unit, and $150 per visit to a hospital emergency room. Although payment of claims under this policy is related to healthcare services rendered to the insured, the policy is not healthcare insurance that pays for medical expenses. The insured is free to use the funds in any manner he or she wishes, i.e., for rent or a car payment.

Nickerson was sitting in a motorized wheelchair on a lift about to be lowered from his van when he accidentally struck the control, causing the wheelchair to lurch forward. He fell from the wheelchair on the lift down to the pavement. Nickerson suffered a comminuted, displaced fracture of his right tibia and fibula, meaning that the leg was broken, splintered, and out of place. Stonebridge acknowledged that Nickerson’s claim fell within the policy’s grant of coverage and not within any of the policy’s stated exceptions.

Nickerson’s lawsuit alleged Stonebridge breached the insurance contract by failing to pay him benefits for the full 109 days of his hospital stay and that Stonebridge breached the implied covenant of good faith and fair dealing by acting unreasonably and in bad faith in denying him the full policy benefits.

The jury returned a special verdict finding that Stonebridge’s failure to pay policy benefits was unreasonable or without proper cause and that Nickerson suffered $35,000 in damages for emotional distress as a result. The jury also found Stonebridge had “enagage[d] in the conduct with fraud.”

Stonebridge moved for judgment notwithstanding the verdict (JNOV) seeking a reduction in the punitive damage award from $19 million to $35,000. The insurer argued that the punitive damage award was unconstitutionally excessive and that it should not exceed the amount of tort damages awarded. The trial court denied Stonebridge’s JNOV motion. On the new trial motion, after conducting the constitutional analysis under State Farm and Simon, the trial court reduced the punitive damage award to a ratio of punitive to compensatory damages of 10:1.

The trial court entered a judgment on June 13, 2011, awarding Nickerson compensatory damages of $31,500 for breach of contract and $35,000 for breach of the implied covenant, plus $12,500 in attorney fees as economic damages, $30,603.45 in costs, and $19 million in punitive damages. Nickerson rejected the reduction in punitive damages and filed a timely appeal from the order granting a new trial.

CONTENTIONS

Neither party challenges the judgment of liability or the jury instructions employed at trial. Accordingly, we address neither the correctness of the liability judgment nor the instructions. The contentions on appeal raise only the question of whether the remitted punitive damage award passes constitutional muster under the due process clause.

DISCUSSION

By way of background, the jury was given a special verdict form that asked it to answer separately whether Stonebridge’s conduct involved “oppression, ” “malice, ” or “fraud.” The jury answered these three questions, “No” as to oppression, “No” as to malice, and “Yes” as to fraud.

Punitive damages may be imposed under state law to further a state’s legitimate interests in punishing unlawful conduct and deterring its repetition. States have considerable flexibility in determining the appropriate level of punitive damages to allow in different classes of cases and in any particular case. The amount of punitive damages offends due process under the Fourteenth Amendment as arbitrary only if the award is grossly excessive in relation to the state’s legitimate interests in punishment and deterrence.

In determining the constitutional maximum for a particular punitive damage award under the due process clause, we are directed to follow three guideposts:

(1) the degree of reprehensibility of the defendant’s misconduct;

(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 by the jury and the civil penalties authorized or imposed in comparable cases.

The most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct.

In addition to its treatment of Nickerson, the record reveals Stonebridge’s indifference to the health and safety of others through its practice of using the hidden “Necessary Treatment” limitation to deny other policyholders’ claims and by preventing full communication between peer reviewers and treating physicians. Stonebridge’s conduct involved repeated actions; it was not an isolated incident and reprehensibility is influenced by the frequency and profitability of the defendant’s prior or contemporaneous similar conduct. A recidivist may be punished more severely than a first offender because repeated misconduct is more reprehensible than an individual instance of malfeasance.

California has the constitutional freedom to use punitive damages as a tool to protect the consuming public, not merely to punish a private wrong. The harm Nickerson suffered as the result of Stonebridge’s conduct was not accidental, but the result of a deceitful practice designed to deny him his policy benefits. The jury found Stonebridge engaged in fraud. Thus, the jury found Stonebridge engaged in intentional misrepresentation, deceit, or concealment and Stonebridge’s conduct was necessarily not accidental.

The ratio of punitive damages to actual or potential harm

Punitive damages must bear a reasonable relationship to compensatory damages or to the plaintiff’s actual or potential harm. Courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.

In California, our Supreme Court discerned the following presumption from the high court’s endorsement of single-digit ratios. Ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification cannot survive appellate scrutiny under the due process clause. Nickerson received a small amount of compensatory damages for his personal injury, for which the monetary value was difficult to determine. Nickerson’s $35,000 tort award contains no punitive element as that award was to compensate him for his emotional distress, not to punish Stonebridge.

The order denying the motion for judgment notwithstanding the verdict is affirmed. The order granting new trial is vacated. The trial court is directed to modify the June 13, 2011 judgment by reducing the punitive damage award to $350,000. As modified, the judgment is affirmed.

Justice Crosky dissented because an inconsistent verdict, finding fraud but no malice, ordinarily requires a reversal for a new trial. However, he concluded a new trial is not warranted as there is no substantial evidence to support the jury’s finding of fraud. As a result, Stonebridge is entitled to a judgment that awards no punitive damages.

ZALMA OPINION

The state of California, through its Legislature and Courts, have determined that punitive damages serve a public purpose and deter wrongdoers from wrongful conduct. Regardless to allow Nickerson and his lawyers to benefit from $19 million in punitive damages based on only $35,000 in compensatory damages would do the exact opposite of serve a public purpose. As I have said in the past, the tort of bad faith and punitive damages must be reconsidered.

Juries are often mislead that the poor victim of an insurer’s bad faith will be able to enjoy the compensation. As I also pointed out previously that is a false impression. After paying a contingency fee to counsel and state and federal income taxes the plaintiff recovers little or nothing of the punitive damages. Only the lawyers profit.

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. 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 only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

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

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