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Detours: Campbell Stops At The Willow Inn

April 19, 2005

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 18, #24, p. 27 (April 19, 2005). © Copyright Butler 2005.  

Dealing with punitive damage claims is like driving down a road that is constantly under repair. The road is dangerous, uncomfortable, and full of detours. Although the United States Supreme Court has issued a rather clear and accurate map to help us through this rocky road, in some respects the map is already outdated, just as the road darkens and your interior auto light dims.

Recently, in the case of Willow Inn, Inc. v. Public Service Mutual Insurance Company,[1] the Third Circuit Court of Appeals, in an attempt to shed light upon this dangerous path, has cast confusing and dangerous shadows, making the road all the more treacherous.

I. The Campbell Map

The Supreme Court’s map to punitive damages can be found in two of its recent decisions in this area. The first set of directions was issued in 1996 when the Supreme Court decided BMW v. Gore.[2] The second set of directions is found in State Farm v. Campbell.[3] These two cases combine to form the somewhat-less-than-clear map we are currently using as we try to find our way.[4]

The first half of the map comes from BMW v. Gore. In Gore, the Supreme Court issued three guideposts to direct how punitive damages must be applied. These guideposts are:

1) Degree of Reprehensibility – how bad was the defendant’s behavior;
2) Ratio – ratio of compensatory damages to punitive damages; and,
3) Comparable Penalties – how do other available civil or criminal penalties relate to the size of the punitive damages award.[5]

Finding that many courts throughout the country had difficulty following these guideposts, the Supreme Court then gave additional direction in State Farm v. Campbell.[6]

Campbell has two important aspects that give guidance as to the constitutionality of punitive damages. The first holding of Campbell is that punitive damages should not exceed a ratio greater than 9 to 1. That is, a $1000 economic damages award should never be accompanied by a punitive damages award exceeding $9,000, or a multiplier of 9. The second holding of Campbell is equally important. As a compensatory award approaches $1,000,000, the punitive multiplier goes down and when the compensatory award reaches $1,000,000, the multiplier should be no higher than 1.0.[7] These two decisions together, the Gore guideposts and the Campbell cap, form the map we must use to navigate down the road of punitive damages.

II. Overnight at the Willow Inn

Recently, the Federal Third Circuit Court of Appeals decided a punitive damages claim in connection with a first party property insurance breach of contract action. In Willow Inn, Inc. v. Public Service Mutual Ins. Co., the Third Circuit was asked to review a punitive damages award of $150,000 in light of a compensatory award of $2,000.[8]

One might think, in light of Campbell’s single digit multiplier rule, that this award would be declared unconstitutional. After all, Willow Inn’s multiplier was 75. If you thought that, you would be wrong.

Instead of interpreting the Campbell cap literally, the Willow Inn court got creative.[9] The court found that it was not the actual compensatory damage award for the breach of the insurance contract that mattered for purposes of calculating the ratio of compensatory damages to punitive damages. Instead, the court found it was also the statutory attorneys fees that had to be added to the compensatory award before calculating the ratio. As a practical matter, though, attorneys’ fees are awarded after the entry of a decision on the compensatory and punitive damages. In other words, the punitive damage figure was awarded and then it had to be supported by some legal fiction to support the size of the award. In searching for a creative way to support this award, the court found the basis of asserting that the statutory attorneys fees were the basis for the size of the award. In effect, the court found the result it sought and then went about trying to justify that result.

But what caused the court to be so adamant that punitive damages were appropriate in this instance? The facts of Willow Inn will show us. The Willow Inn was a bar and restaurant in Pennsylvania that suffered significant tornado damage. Shortly after the loss, the Willow Inn hired a public adjuster to “assist” in the presentation of the claim to the carrier. The public adjuster forwarded an initial claim estimate of $216,000 three weeks after the loss. Some seven weeks after the loss, the carrier’s independent adjuster responded with an estimate for $90,000. Three and a half months after the loss, the carrier provided a $75,000 advance. Four months after the loss, the public adjuster and independent adjuster agreed to a claim amount of $126,810. The carrier, for whatever reason, failed to pay the difference between the $75,000 advance and the $126,810. The carrier simply ignored its independent adjuster.

Now five months post-loss, Willow Inn submitted a Sworn Statement in Proof of Loss for $127,810. It reached this amount by subtracting a $1,000 deductible and claiming $2,000 in loss adjustment expenses associated with the claim (an amount covered under the policy). Moreover, this figure was based on the agreement reached between the public adjuster and the carrier’s independent adjuster. Inexplicably, the carrier rejected the proof of loss.

For whatever reason, the carrier decided to make things worse. Ignoring the agreement and its independent adjuster, the carrier offered $16,312 to settle. The insured rejected the offer and requested an appraisal. Notwithstanding that the carrier has paid $75,000 towards the loss, that its own adjuster agreed to an amount in excess of the amount offered by the carrier, and the fact that there was a disagreement as to the amount of the loss, the carrier rejected the appraisal outright.

Willow Inn then filed suit seeking appraisal and the court ordered the carrier into appraisal. At appraisal, the umpire fixed the loss at $117,000, which included $2,000 in loss preparation costs. The carrier refused to pay the $2,000 in loss preparation costs.

Willow Inn then filed suit, again, against the insurer for breach of contract and sought punitive damages. The trial court found the insured “had reasonably expended ‘well in excess of the $2,000 policy limit’ in preparing the Proof of Loss.”[10]

To recap, the carrier paid only a $75,000 advance on a claim that it agreed was worth $126,810, rejected a proof of loss, ignored coverage for loss adjustment expenses, improperly rejected an appraisal request, was sued for and ordered into appraisal, ignored an appraisal award of loss adjustment expenses, and was sued a second time for breach of contract over the $2,000 in loss adjustment expenses.

One might hope that a carrier, faced with this situation, would pack up, pay its $2,000, and call it a day. But no, this particular carrier drew a line in the sand and was apparently determined to litigate to the hilt to protect that patch of sand.[11] Unfortunately, things got worse.

The federal district court found the insurer in “bad faith” stating:

. . .I find that [the insurer’s] conduct constituted bad faith. . . Specifically, unreasonable delays in the processing of the Willow Inn’s claims were extraordinarily unwarranted such that there can be no conclusion except that [the insurer] knowingly and recklessly disregarded the absence of a reasonable basis for its conduct. The record is replete with examples of [the insurer’s] failure to respond in a timely fashion to Willow Inn’s various reasonable requests, and even to the requests of those working on [the insurer’s] behalf.[12]

Not satisfied with generally bashing the conduct of the insurer, the trial court got specific:

As one egregious example, [the insurer’s] unjustified delay in appointing an appraiser prevented the appraisal from commencing, despite the Willow Inn’s and its adjusters’ diligent efforts, until more than eight months after the Willow Inn’s initial appraisal request. Similarly, [the insurer] failed to pay the Willow Inn’s loss, or to even acknowledge the Willow Inn’s request for more than three months, despite ample evidence that the Willow Inn was entitled to this compensation. While each of these examples standing alone evinces bad faith, this conclusion becomes even stronger when one considers the abundance of evidence presented at trial pointing out the dramatic contrast between the Willow Inn’s conscientious efforts and [the insurer’s] reckless and obstructive actions.[13]

Suffice it to say that the district court was very unhappy with the insurer. The district court awarded $2,000 in compensatory damages, $150,000 in punitive damages, $128,075 in attorneys’ fees, and $7,372 in costs.[14] Not satisfied with the district court’s decision, the award was appealed by the insurer, apparently convinced that Third Circuit would rush in to save this innocent insurance company.[15]

The Third Circuit was charged with comparing the Supreme Court’s map from Gore and Campbell against the behavior of the carrier “at” the Willow Inn. The court stated:

Addressing each of the three Gore/Campbell guideposts, and acknowledging the “inherent imprecision” of the substantive due process analysis, we consider the $150,000 punitive damages to approach but not cross the constitutional line.

Turning to the first of the Gore guideposts, the degree of reprehensibility, the court found:

. . .the critical input to the reprehensibility calculus in this case is whether the delay in settling the claim was due to legitimate differences of opinion over its value or, rather, to [the insurer’s] dilatoriness and inertia.[16]

In this case, the court found that there was no excuse for the delay in settling the claim. The court could find no valid reason for the carrier’s behavior. Why did the carrier not pay the damages agreed between the insured and the carrier’s independent adjuster? Why did the insurer balk at paying the loss adjustment expenses? Why did the carrier ignore the appraisal award? These are questions the carrier could not answer.[17]

Turning to the second of the Gore guideposts, ratio of punitive damages to harm, the court had to get creative. In order to justify a punitive damages award of $150,000 under Campbell, the court had to find a large enough compensatory amount to use in the ratio. What did the court do? The court found that the proper number was the total contractual award and statutory attorneys’ fees. It reasoned:

We view the $2,000 award on Willow Inn’s contract claim to be incidental to the punitive damages award. . . . As Willow Inn’s main insurance claim had been settled before this case was brought, and because the $2,000 award on the contract claim was only incidental to the bad faith thrust of this litigation, we conclude that the attorney fees and costs awarded as part of the [bad faith statute] is the proper term to compare to the punitive damages award for ratio purposes. These awards totaled $135,000, resulting in approximately a 1:1 ratio, which is indicative of constitutionality under Gore and Campbell.[18]

Thus, the Willow Inn Court recognized any punitive award had to comply with the Campbell cap. It, however, rationalized that the “bad-faith” compensatory damages include statutory attorney fees.

The real danger of the Willow Inn decision is in the recharacterization of statutory attorneys’ fees awarded under a “bad faith” statute as damages appropriate to consider when weighing the size of punitive damages against the compensatory damages under Gore and Campbell. While recognizing this danger, the court notes:

The attorney fees and costs here were awarded in the insured’s bad faith suit, not in a suit to settle the main underlying insurance claim, which eventually [the insurer] paid. Therefore, it is something of a stretch to say that [the insurer] “inflicted” Willow Inn’s attorneys fees and court costs on it. . . .

We acknowledge that this conclusion is not without conceptual difficulty. The purpose of Pennsylvania’s bad faith statute and the language establishing the ratio analysis in Gore and Campbell are in tension. [The bad faith statute] empowers a court which finds “that the insurer has acted in bad faith towards the insured” to award interest, shift the insured-plaintiff’s court costs and attorney fees to the insurer-defendant, and impose punitive damages. . . . Pennsylvania policy and the Gore/Campbell ratio language collide where, as here, an insurer’s conduct in settling and paying a claim is unacceptable, but where the claim itself was settled and paid prior to the commencement of a [bad faith statutory] action.[19]

(Emphasis supplied). The consequences from this language will likely be felt for years to come. The court concluded that fee shifting under “bad faith” statutes is a form of compensatory damage that can be a part of the ratio of punitive damages to compensatory damages. Importantly, this conclusion also suggests that other extra-contractual damages, in addition to attorneys fees, can be used as the basis for punitive damages. This ruling is irrational jurisprudence apparently “compelled” by a desire to award punitive damages in excess of constitutional limits.

Turning to the third and final guidepost, civil penalties, the court found that there was little disagreement on the facts and the law. The largest civil penalty under Pennsylvania law for a violation was $5,000. Accordingly, “The punitive damages amount here is 30 times as large. . .” The court then noted, rather smugly, that “the Supreme Court has not declared how courts are to measure civil penalties against punitive damages. . .” and “we are similarly unsure as to how to properly apply this guidepost, and are reluctant to overturn the punitive damages award on this basis alone.”

III. Where Bad Directions Can Take Us

The day after Willow Inn was decided, a federal district court took the Willow Inn decision to the extreme. Sheedy v. City of Philadelphia[20] involved a fight in an ugly divorce over whether personal property belonged to the husband or the wife.[21] While the husband was out of town, the wife apparently “broke into” her estranged husband’s house and took personal property. The husband returned, found the missing items, and asked the police to press charges against his wife. The police arrested the wife. Turns out that only one of the items taken actually belonged to the husband, a fact contrary to the husband’s sworn statement to the police which formed the basis for the arrest of the wife.[22] Given the acrimonious nature of this particular divorce, and after resolving the propriety of the criminal charges with the prosecutor, the wife filed a civil lawsuit against her husband for malicious prosecution and false arrest.

The civil lawsuit went to a jury and the jury awarded compensatory damages of $3,075 and punitive damages of $500,000. Under any application of the Campbell cap, the punitive award was grossly excessive because the resulting multiplier would, using the face amount of the compensatory and punitive awards, result in a ratio of 163:1 In fact, the court stated, “I readily agree that, compared to the compensatory award, the punitive award exceeds the guideline. . .”[23] But rather than do what the Supreme Court has decreed, the judge in the district court got creative. Building on the Willow Inn decision, the Sheedy court found it possible that a jury could have awarded a larger compensatory damages award.

In coming to this conclusion, the court began by noting:[24]

If, as the jury’s answers to interrogatories can be read to suggest, the jury concluded that plaintiff’s compensatory damages actually totaled only $3,075, then the $500,000 punitive award cannot possibly be upheld.

Apparently the court recognized and agreed that the Gore guideposts and Campbell cap prohibited such an extraordinarily large punitive damages award in relation to the compensatory damages. The court, however, was not done. It was determined to find some justification to give a significant punitive damages award to the plaintiff. Building on the creativity of Willow Inn, the court stated:

But it seems obvious that, in this case, the compensatory award included only plaintiff’s actual out-of-pocket expenses (lawyer fee’s and bail money), and did not include the very substantial non-economic damages she sustained. A respectable housewife with young children, she suffered the humiliation and embarrassment of being arrested, and of spending two days in durance vile. For the rest of her life, she will have a police record, which will have to be explained in any future employment application or similar circumstances. I have no doubt whatever that the jury’s $500,000 punitive award actually included a substantial amount of compensatory damages.[25]

The court recharacterized a portion of the punitive damages award as compensatory damages for purposes of the Gore guideposts and Campbell cap. In other words, it justified the punitive damages award with the punitive damages award. While it is certainly easy to agree with the judge’s desire to compensate the wife, it is not the judge’s place to rethink what a jury did, or more importantly, guess at what they could have done. By doing so, this district court injected substantial doubt into the fairness of the Campbell cap and Gore guideposts, or even whether they have any effect whatsoever.

Willow Inn is not the first example of courts finding creative means to allow extraordinarily high punitive awards against an insurance carrier. In 2003, the Supreme Court of Wisconsin, in Trinity Evangelical Lutheran Church v. Tower Ins. Co.,[26] found itself searching for a basis to justify a punitive damages award it thought was appropriate under the circumstances:

The $3,500,000 punitive damages award will serve the legitimate state interest in deterrence, as well as punishment. Consequently, the punitive damages award will send a message not only to Tower, but to other insurance companies as well, that ignoring its duties as an insurer is not acceptable and might very well result in substantial punitive damages.[27]

Following the court’s decision that a $3.5 million punitive award was appropriate, it then had to find justification for an award it knew would clearly exceed the Gore guideposts and Campbell cap.

Trinity involved a dispute over a liability binder that failed to include all coverage requested by an insured. Trinity tried to avoid all coverage under the policy, but eventually paid $490,000 on behalf of its insured to settle the liability claim. The insured suffered $17,000 in actual damages.[28] The Trinity court, well aware that using the $17,000 figure would result in a multiplier of more than 200, was determined to use the “potential” harm of $490,000. It reached this conclusion notwithstanding the fact that the insurer paid the liability claim. Using the $490,000 figure as the “damage” for the Campbell ratio allowed a ratio of 7:1 – a ratio that is constitutionally permissible.[29] Unfortunately, the court failed to disclose why it chose the $490,000 figure over the $17,000. One can only deduce that the court took a deliberate detour around the Campbell constitutional limits.

IV. “Some Stretch”

The lesson and warning we can all take from Willow Inn is that if the conduct of the insurance carrier is reprehensible enough, a court will find a way to justify a punitive damages award. The problem we all face is that if any insurer acts as badly as the carrier did in Willow Inn, it will affect all of the carriers throughout the country. There is now a federal circuit court decision that arguably eviscerates some of the constitutional assurances intended under the Gore guideposts and Campbell cap.[30]

The insurance industry has a large say in how the next post Gore/Campbell cases shape punitive damages. If carriers act irresponsibly and create terrible fact patterns on appeal, they will find more decisions like Willow Inn.


  1. 399 F. 3d 224 (3d Cir. 2005).
  2. 517 U.S. 559 (1996).
  3. 538 U.S. 408 (2003).
  4. One of the major reasons there has been this run of recent Supreme Court decisions on the Constitutionality of large punitive awards is that these awards have become morally easy for the everyday man or woman on the street, and consequently the juries deciding the size of punitive awards. Jurors feel they are personally empowered to help the “victim” they have come to know over a course of days or weeks against the “evil” corporation. Justice O’Connor, in Pacific Mut. Life Ins. v. Haslip, 499 U.S. 1, 42 (J. O’Connor dissenting) said it best thirteen years ago:
    Punitive damages are a powerful weapon. Imposed wisely and with restraint, they have the potential to advance legitimate state interests. Imposed indiscriminately, however, they have a devastating potential for harm. Regrettably, common-law procedures for awarding punitive damages fall into the latter category.
  5. Id. at 574—75.
  6. Gore and Campbell do not comprise the entire collection of recent Supreme Court decisions regarding punitive damages. In 2001, the Court freed the hands of appellate courts throughout the country to review punitive damage awards. In Cooper Industries, Inc. v. Leatherman Tool Group, Inc., the standard of appellate review was changed from abuse of discretion to de novo. 532 U.S. 424 (2001).
  7. These limits must be distinguished from statutory damages where there is little if any compensatory damage and the “punitive” nature of the award is set by the State. Typically, statutory damages do not engender the same crippling fear caused by policy and procedure punitive damage threats (or “Institutional Bad Faith”) from what should be an ordinary slip and fall. For a detailed discussion of the Supreme Court’s recent guidance on punitive damages, see Punitive Damages And Hip-Hop, John J. & Eric W. Dickey, in Mealey’s Litigation Report: Insurance Bad Faith, September 7, 2004 (Vol. 18, #9).
  8. The punitive damages award was made pursuant to Pennsylvania’s “Bad Faith” statute that provides:
    In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

    (1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
    (2) Award punitive damages against the insurer.
    (3) Assess court costs and attorney fees against the insurer.

    42 Pa. C.S.A. § 8371

  9. This is certainly not the first decision, nor will it be the last, where a court takes liberties with the Campbell decision. In fact, the Utah Supreme Court was creative in applying the Campbell decision when the Campbell case itself was remanded back to the state court system. For a detailed exploration of this decision, see Piece of Mind: The Utah Supreme Court’s Response to Campbell, John J. & John V. Garaffa, in Mealey’s Litigation Report: Insurance Bad Faith, January 18, 2005 (Vol. 18, #18).
  10.  Willow Inn at 228.
  11. Not only did the carrier litigate the case ferociously in the trial court, it appealed the case twice to the third circuit. The first appeal was in Willow Inn, Inc. v. Public Service Mut. Ins. Co., 66 Fed. Appx. 398 (3d Cir. 2003) and the second appeal two years later in Willow Inn, Inc. v. Public Service Mut. Ins. Co., 399 F.3d 224 (3d Cir. 2005).
  12. Willow Inn, 399 F.3d at 229.
  13. Id.
  14. Bear in mind that the entire award was based solely on a dispute over $2,000 and this figure ignores defense and appellate costs, which we speculate could be significant in this case. Yet despite the clear business interests of paying $2,000 to put a difficult situation behind it, the carrier vigorously litigated this case and ultimately ended up paying hundreds of times more than what it could have resolved this matter for earlier. All simply out of pride or a mistaken belief that the insured was lying about incurring $2,000 in loss adjustment expenses.
  15. This is probably one of those situations where a carrier should recognize it does not have the best set of facts for an appeal, pay the funds it was ordered to pay, and move on to the next claim.
  16. Id. at 231.
  17. More importantly, it appears the carrier did not internally ask these questions of itself. Why did this not happen?
  18. Id. at 235.
  19. Id. at 235—6.
  20. 2005 WL 375657 (U.S.D.C. Penn. 2005).
  21. The husband in this case was an attorney. It’s situations like this one that give attorneys bad names. In fact, the court notes:
    A more difficult problem stemmed from the fact that defendant’s trial counsel had convinced himself that the fact that plaintiff was a joint owner of the residence and a joint owner of most of the property therein was entirely irrelevant to the issue of probable cause for her arrest for burglary. Counsel persisted in maintaining that position throughout the trial, and felt that the court’s charge was grossly unfair because the court entertained a different view of the legal rights of the parties. Frankly, I found it difficult to accept the notion that Mr. Gilly, himself a lawyer, could charge his wife with burglary for entering their jointly-owned residence. From their verdict, it appears that the jury agreed with this assessment
    Id. at 2 (Slip Opinion).
  22. The court noted that this was a difficult position to accept given the fact that the husband submitted to the district attorney a detailed list of stolen property having an aggregate value of $12,000.
  23. Id. at 5 (Slip Opinion).
  24. The court, however, makes no additur award to the compensatory damage figure to somehow justify its punitive damage award. Instead, it simply applies the Campbell cap and Gore guideposts based on the possible award, not the award the jury actually determined.
  25. Id. While the court was certainly creative, the jury actually did award compensatory damages totaling $3,075 and punitive damages of $500,000. There is no basis to “debate” whether this is what the jury awarded. This is simply what the jury did.
  26. 661 N.W.2d 789 (Wis. 2003).
  27. Id. at 800.
  28. Though the exact nature of the loss is unclear.
  29. It appears that courts are determined to ignore the fuzzy ratio limitation of 1:1 for punitive damages that exceed $1 million otherwise known as the Campbell cap.
  30. Fortunately, other circuit courts continue to observe the Campbell cap and Gore guideposts. For instance, the Ninth Circuit just affirmed a district court judge’s decision to reduce a punitive damages award to a multiplier of 5 in order to comply with the directions from the Campbell and Gore decisions. Konvitz v. Midland Walwyn Capital, Inc., 2005 WL 697053 (9th Cir. Slip Op. Mar. 28, 2005).