Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Wormuth sued for attorney’s fees incurred in responding to State Farm’s removal petition, relying on 28 U.S.C. § 1447(c) which allows a court to award attorney’s fees where the removing party lacks an objectively reasonable basis for seeking removal. State Farm argued the federal court lacked jurisdiction to consider Wormuth’s motion because she failed to request fees in the remand order itself and because its removal was based on objectively reasonable grounds. The trial court found State Farm lacked an objectively reasonable basis for removing the case and awarded Wormuth 60% of the fees requested.

Also on May 21, 2008, in Gulley v. Farmers Ins., 2008 U.S. Dist. LEXIS 40666, the U.S. District Court for the Western District of Oklahoma held the jurisdictional requirement for diversity jurisdiction had been met after considering together the allegations in plaintiff Gulley’s complaint and defendant Farmers’s notice of removal. Gulley sued Farmers for breach of contract and bad faith for failure to timely evaluate and pay Gulley’s underinsured motorists claim, alleging, among other things, that she had “repeatedly requested” Farmers provide her an evaluation of her claim but Farmers failed to do so. Her complaint sought contract damages of $30,000, unspecified compensatory damages and punitive damages “greater than $10,000.”

Farmers’ petition stated that Oklahoma law allowed a punitive damages award equal to actual damages or $100,000, whichever is greater. The punitive damages number together with the allegations in Gulley’s complaint that Farmers ignored her repeated requests to evaluate her claim, that she was owed $30,000 on her breach of contract and that her unspecified compensatory damages may conceivably include emotional distress or economic damages resulting from Farmers’ conduct, persuaded the court that the amount in controversy had been met.

In making its decision, the court reviewed the “guideposts” recited by the US Supreme Court in BMW of North America, Inc. v. Gore, 517 US 559, 568 (1996) and State Farm Mut. Ins. Co. v. Campbell, 538 US 408 (2003), in analyzing punitive damages awards for excessiveness. Of particular note is the court’s determination that the 4:1 ratio was appropriate in this case as opposed to the recent $79.5 million punitive damages award it upheld several weeks ago which is summarized in our prior post concerning the Williams v. Phillip Morris case. The court specifically stated that an award that exceeds the single-digit ratio may be acceptable in a “few narrow circumstances” including when “extraordinarily reprehensible” conduct is involved such as the conduct in Williams. The court referenced the fact that only economic harm was present in this case and Farmers’ conduct was not comparable to the conduct of Phillip Morris’ “50-year campaign to delude a large part of the population of Oregon about the potentially devastating physical effects of smoking its products.” The court ultimately determined that the 4:1 ratio was constitutionally permissible and directed remand for a new trial unless the plaintiff agreed to remittitur of punitive damages to four times the compensatory damages award. This is not likely to be the court’s last take on what is a constitutionally permissible punitive damages award.

In Goddard v. Farmers Ins. Co. of Oregon, an Oregon jury had awarded $20.7 million in punitive damages against Farmers after its failure to pay its $100,000 auto limit resulted in a $863,274 verdict against the insured.  The Oregon Supreme Court affirmed te jury's finding of bad faith, noting that:

In summary, we conclude that defendant's actions were directed at a financially vulnerable victim, were not confined to this victim alone, and involved intentional malice and deceit. On the other hand, defendant's actions caused economic harm only and did not evince a reckless disregard for the health or safety of others, although defendant is entitled to little credit for either factor -- cases of economic harm like the present one seldom provide malefactors with an opportunity to meet either of those criteria. Taken together, our analysis of the five reprehensibility factors set out in Gore, considered in light of the economic nature of defendant's wrongdoing, leads us to conclude that defendant's actions were very reprehensible.

Despite Farmers' argument that Campbell required a 1:1 ratio of punitive to compensatory damages, the Oregon Supreme Court concluded that a ratio of 4:1 was more appropriate.  Since the ratio here was closer to 16:1, the court held that a new trial limited to punitive damage was necessary unless the insured agreed to accept a reduced award based on a 4:1 ratio.

In calculating the ratio, the Supreme Court held that it was appropriate to consider pre-judgment interest awarded to the plaintiff in applying such ratios but that the amount of the damages was also properly reduced by the jury's finding of 20% comparative fault.

The case came to the U.S. Supreme Court on a petition for certiorari from the Ninth Circuit, which had upheld a lower court’s finding that punitive damages were warranted but halved the amount of the award from the original $5 billion.

As the transcript of the argument reveals, the questioning was brisk. The initial focus of the Justices’ inquiry was on whether federal maritime law allowed an award of punitive damages based on the conduct of some other than a senior executive. Although counsel for Exxon conceded that the captain of the Exxon Valdez was a “managerial agent,” he argued that Captain Hazlewood, while more than a mere cabin boy, was not someone who had responsibility over that area of the company’s operations for an award of punitive damages against the company to be justified. There was a clear split among the Justices with respect to whether this is a long-standing tradition in federal maritime law and whether it is appropriate to treat maritime corporations differently from other U.S. corporations in this regard.

Although Exxon is clearly not an insurance case, this aspect of the court’s analysis has interesting implications for insurers in view of the fact that many states, while generally barring insurance for punitive damages, permit coverage where the insured’s liability is vicarious and not the direct result of misconduct by the company itself.

The second question addressed by the Justices was whether punitive damages are warranted under federal maritime law for unintentional oil spills. Exxon pointed out to the court that there had only been four cases of federal maritime punitive damage awards prior to the passage of the federal Clean Water Act. Exxon argued that there was no common law tradition of such awards and that Congress had indicated an unwillingness to sanction such awards by failing to provide a punitive remedy in the Clean Water Act.

Finally, counsel for Exxon argued that deterrence was not a realistic consideration in cases of this sort where there was no evidence of malice or bad motive, no possibility of concealment, no effort to gain a profit and the defendant had already paid vast sums in compensatory damages and for remedial efforts.

Arguing for the plaintiffs, counsel argued that the Exxon Valdes was a discrete business unit of Exxon over which Captain Hazelwood had executive control. Justice Roberts pressed counsel as to why a corporation should be liable for punitive damages if it had a policy a that only appropriate individuals should be hired that, unbeknownst to it, was violated by the employee. Counsel argued that it was insufficient to merely have a paper policy, that policy must be implemented soundly.
The Justices also debated what sort of “guideposts” should determine the amount of awards in federal maritime cases and, in particular, whether the same Gore standards (e.g., reprehensibility) that had guided their “due process” cases should be determinative or whether greater emphasis should be placed on statutory standards such as the Clean Water Act. Counsel for the claimants argued vehemently against any “bright line” ratio notwithstanding the suggestion of certain Justices that a ratio of 5-1 might be appropriate.

As among the Justices, only Chief Justice Roberts and Justice Scalia appeared to clearly be leaning Exxon’s way, with both Justices Ginsburg and Breyer adopting a more hostile attitude to both the legal and procedural aspects of Exxon’s claim.

Given the tone of the Justices’ questioning and the fact that they only accepted certiorari on issues specific to federal maritime law, it seems relatively unlikely that much of their opinion, when it is issued, will have a significant impact upon the manner in which state and federal courts around the country continue to address due process issues involving awards of punitive damages in non-maritime cases.

Philip Morris appealed and, after a lengthy appeal process, the Oregon Supreme Court concluded the punitive award comported with federal due process and that the proposed jury instruction incorrectly stated the requirements of federal due process and therefore the trial court did not err in refusing to give the instruction. On certiorari, the US Supreme Court concluded that due process prohibits a jury from using a punitive damage verdict to punish a defendant directly for harm to nonparties. Determining that the Oregon Supreme Court had applied the wrong constitutional standard to the proposed jury instruction proffered by Philip Morris, the Court vacated the Oregon Supreme Court’s earlier decision and remanded.

On remand, the Oregon Supreme Court determined that the trial court correctly refused to give the instruction because it contained several other errors completely unrelated to the issues addressed by the US Supreme Court. The Oregon Supreme Court found that the instruction misstated Oregon law in that it incorrectly told the jury that the factors to be used in awarding punitive damages were discretionary when they are mandatory according to state statute and that the instruction mischaracterized this statutory language by referring to a defendant’s “motivation to make illicit profits” as compared to the “profitability of the defendant’s misconduct” as set forth in the statute. The Oregon Supreme Court therefore reaffirmed its prior decision. Shortly after the release of this decision last week, Philip Morris vowed to appeal to the US Supreme Court. A substantive due process issue that the US Supreme Court found unnecessary to address in its decision last year will likely be the subject of the Philip Morris petition.