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

Last December, the U.S. Supreme Court heard oral argument in Williams v. Phillip Morris, a smoking/punitive damages case that has already been considered by the court once. Questions asked by the justices reflected considerably skepticism that the Oregon Supreme Court had, in fact, ignored the dictates of Williams I in reaffirming the original $80 million punitive damages award on the basis of Oregon state law, thus circumventing the constitutional due process concerns that the Court had expressed in its earlier opinion. In a surprising development, Chief Justice Roberts suggested the possibility that the court might itself take on the core issue of whether a specific punitive to compensatory damages ratio should be set by the Court, a task that the court had avoided several years ago in Campell and had expressly not agreed to consider when it accepted review of Williams.

Since then, the Third and Sixth Circuits have issued a pair of unpublished opinions reducing punitive damage awards to a 1:1 ratio.

In Jurinko v. Medical Protective Co., 2008 WL 5378011 (3rd Cir. December 24, 2008), the Third Circuit ruled in a Pennsylvania case that although a medical liability insurer acted outrageously in failing to settle the claims, an award of punitive damages that was four times the size of the compensatory damage award was unconstitutionally excessive. In ordering that a 1:1 ratio be used (thus reducing the punitive award to $1.6 million from $6.25 million), the court emphasized the substantial size of the compensatory damages awarded, as well as the fact that the injury in question was economic, not physical, and not the product of repeated reprehensible conduct by the insurer. The opinion is unpublished, perhaps because Judge Marion Trump Barry recused herself after oral argument after belatedly discovering facts giving rise to a conflict of interest.

More recently, the Sixth Circuit has ruled in an age discrimination case that where the jury awarded $1 million in past compensatory damages, $4.5 million in future economic compensatory damages, $500,000 in non-economic compensatory damages and $10 million in punitive damages, that although the punitive award did not violate Ohio state due process protections, it conflicted with the guideposts set forth by the U.S. Supreme Court in Campbell. The court ruled inMorgan v. New York Life Ins. Co., 07-4186 (6th Cir. March 12, 2009) therefore, that the punitive award must be reduced to an amount not to exceed $6 million for a ratio of 1-1.

It remains to be seen how the U.S. Supreme Court will rule this time around in Phillip Morris. In the interim, these new decisions lend encouragement to defendants facing such awards. At the same time, the fact that both opinions are unpublished suggests an air of hesitancy and caution in the manner in which these courts are approaching this issue.
 

The court noted the trial court had reduced the insured’s non-economic compensatory damages from $4 million to $1.2 million, and agreed that a $3 million punitive damages award was more in line with Supreme Court precedent on punitive damages. While the Supreme Court has deliberately chosen not to impose a bright line ratio which a punitive damages award cannot exceed (State Farm v. Campbell, 538 U.S. 408, 426 (2003)), it recently held that “few awards exceeding a single digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Exxon Shipping v. Baker, 554 U.S. ___, 128 Ct. 2605 (2008).

Further, the Ninth Circuit found that the jury’s $1 million award for the insured’s emotional distress, while “generous,” did not shock the conscience of the court; nor did the $200,000 awarded for the insured’s self-inflicted hand injury and relapse.

The insured in Leavey, a prescription drug addict attempting to rehabilitate himself, cut his hand to get prescription drugs and otherwise went into a downward spiral after the insurer wrote him terminating his benefits. He testified he was “devastated” upon receiving that letter, and for six months was anxious, confused and depressed, moving to a cheaper apartment to save money and looking without success for a new job. When the insurer said it was reinstating the insured’s benefits, the insured remained anxious because he thought the insurer might once again change its mind.

There was evidence the insurer knew the insured could not perform the duties of his occupation, but still subjected the insured to a roundtable review, for the sole purpose of closing his expensive claim; that the insurer sought to influence the opinions of the independent medical examiners hired to examine the insured; that it misrepresented the opinions of those independent medical examiners when it announced it was closing the insured’s claim; and that it knew the insured was a vulnerable individual who suffered from anxiety and depression and was recovering from a serious drug addiction and was at a high risk of relapse. Knowing all this, the insured still sent a letter to the insured wrongfully terminating his benefits. The court ruled a jury could have found the insurer acted to serve its own interests and consciously disregarded a substantial risk its conduct might significantly affect the rights of the insured, and that it acted not only in bad faith but also with an “evil mind,” such that punitive damages were appropriate.
 

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.