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. 21, #16, p. 27 (December 18, 2007).
[Editor’s Note: Diane M. Barnes is an associate with the law firm of Butler Weihmuller Katz Craig LLP, with offices in Charlotte, Miami, Mobile, Tallahassee, and Tampa. Her practice centers around the litigation of first-party property coverage issues. This commentary, other than the quoted material, is the author’s opinion; not her firm’s, and not Mealey’s Publications’. Copyright © 2007 by the author. Responses are welcome.]
Since the Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell,1 courts have struggled to define when the Campbell court’s presumptive limit of 9 to 1ratio of punitive damages to compensatory damages is appropriate.2 The Supreme Court stated that the “most important indicium of the reasonableness of a punitive damages award” was the highly subjective measure of the “degree of reprehensibility.”3 Wrestling with such an amorphous concept trial courts and appellate courts have sought to justify various punitive damage awards on the basis of a sliding scale, doing little more than subjectively comparing the “reprehensibility” in the case being reviewed, to other recent cases decided before it. The result is a marked disparity from one court to the next as to what constitutes behavior falling within the five (5) factors of reprehensibility discussed in Campbell.
Campbell provided the following factors to consider when deciding upon the degree of reprehensibility: (1) whether the harm caused was physical as opposed to economic; (2) whether the tortious conduct evinced an indifference to, or reckless disregard of, the health or safety of others; (3) whether the target of the conduct had a financial vulnerability; (4) whether the conduct involved repeated actions or was an isolated incident; and (5) whether the harm was the result of intentional malice, trickery or deceit, or mere accident.4 In this analysis, the degree of reprehensibility is a consideration for determining the amount of punitive damages and whether the ratio between punitive damages and compensatory damages falls into the constitutional cap determined by Campbell. How this determination of reprehensibility ultimately translates into a ratio to compensatory damages is somewhat of a mystery for defendants faced with punitive damage awards.
Campbell requires courts reviewing awards to grant deference to the jury’s award of punitive damages so long as it does not manifestly violate the standards for due process.5 Several courts have recently upheld reduction of jury awards for punitive damages based upon the foregoing five “degree of reprehensibility” factors focusing only upon the ratio of punitive damage to compensatory damages in the case. Others have upheld punitive damage awards based upon a comparison to higher ratios and degree of reprehensibility found in other cases. These cases address the “degree of reprehensibility” and ratio comparisons in the context of insurance “bad-faith” and highlight the rationale for ratios falling within the presumptive constitutional single-digit cap espoused in Campbell.6
In Walker et al. v. Farmers Insurance Exchange,7 decided June 27, 2007, a California appeals court reviewed an award of punitive damages in an insurance “bad-faith” case. The court focused on the degree of reprehensibility using the factors set forth by Campbell and upheld the reduction of a jury award by the trial court. The respondents, Walker and Williams, both owners of a condominium unit and members of the condominium association (“HOA”) were sued by another resident, Wasson, when she was struck by the respondents’ garage door as it was opened remotely by one of the respondents. When struck, Wasson was thrown to the ground and suffered a broken hip.8
A claim was made by Wasson through the HOA. Farmers, the carrier for the HOA, paid $5,000.00 for medical expenses. Wasson alleged she had incurred $75,000.00 in medical bills as a result of the broken hip. Her attorney offered to settle with the HOA for $71,000.00, but the HOA’s adjuster advised that he had been unable to obtain a statement from the HOA and that it was unlikely Farmers would accept that amount for settlement. Approximately three weeks later, Wasson filed suit and named the HOA and respondents as defendants. Respondents hired counsel, who requested Farmers defend them. The adjuster concluded that the respondents liability had nothing to do with “the ownership, maintenance or repair of the premise” as required by the HOA policy.9
Farmers ultimately conceded the defense determination violated its own protocol for determining whether a defense was to be provided once it was requested.10 The respondents settled for $6,500.00, which was covered by credit cards and a personal loan. At the time of the settlement, they owed $45,000.00 in attorneys fees.11 In the trial against the remaining defendant, the jury allocated 10% of the fault to Wasson, 10% to Walker and 80% to the HOA. Respondents subsequently filed their action against Farmers and the trial court concluded Framers had a duty to defend them in the Wasson action. The issue of damages extending from the breach of duty to defend went to trial.
The jury awarded the respondents, the $45,431.80 expended in defending the Wasson action, the $6,500.00 expended for settlement of that action, and $750,000.00 each for emotional distress. In addition, the jury found that Farmers had engaged in conduct with oppression, but oddly, had not engaged in malicious or fraudulent conduct. Furthermore, it found one or more of the officers or managing agents of Farmers knew of and adopted the conduct or approved it after it occurred. The parties stipulated that $8,338,225.73 was one percent (1%) of Farmer’s net worth and that amount was awarded as punitive damages for a total award of $10,032,965.53.12
Farmers subsequently moved for judgment notwithstanding the verdict and for a new trial. The trial court denied the motion for a judgment notwithstanding the verdict, and granted the motion for new trial, unless the respondents would agree to a reduction of the punitive damages award to $1.5 million. The respondents agreed, but both parties appealed the resulting order.13
Upon review, the appellate court cited the standard set by the Supreme Court in Campbell to determine the limits appellate courts were required to enforce in their review of punitive damage jury awards.14 The appellate court noted the constitutional “guideposts” for reviewing courts set by Campbell as follows:
(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 damaged award; and (3) the difference between the punitive damaged awarded by the jury and the civil penalties authorized or imposed in comparable cases.15
Following these factors, the appellate court determined that the 5.5 to 1 ratio of punitive damages to compensatory damages was excessive. The court stated the conduct of Farmers was far less reprehensible than that found in the Campbell case, where the Utah Supreme Court upon remand justified a 9 to 1 ratio between punitive and compensatory damages.16 The appellate court agreed with the trial court’s note of the ratio reasoning in Simon v. San Paolo U.S. Holding Co., Inc.,17 stating:
[W]hile a ratio of 3 or 4 to 1 is guideline norm, where the compensatory damages are substantial, then a lesser ratio, one that is perhaps only equal to compensatory damages in the outermost limit of the due process guarantee.18
In weighing the level of reprehensibility, the Walker trial court looked to the lack of physical harm to the insureds, the lack of indifference or reckless disregard for the health and safety of others, the fact that the conduct was an isolated incident, and that the conduct was the result of oversight and mistake to determine “a relatively low level of reprehensibility.”19 The appellate court found this analysis met with the reprehensibility standards set out by Campbell.20
Further, the appellate court approved the effort of the trial court to balance the “degree of reprehensibility” factors found within the compensatory damages. The court viewed this to be significant as those damages already contained a “punitive element” included in the award for emotional distress.21 Because the compensatory damages were significant and the level of reprehensibility low, the appellate court agreed a 1 to 1 ratio of punitive to compensatory damages was appropriate.22 Most significantly, the appellate court commented upon the ruling of the Utah Supreme Court upon the remand of Campbell to state that while it agreed that the level of reprehensibility justified the award in that case, it disagreed with the proposition that the mere fact that reprehensibility is present, justifies an award of the limits constitutionally allowable for punitive damages.23
Several months later, the same California court in Stone v. Fidelity National Insurance Co.,24 again approved the reduction of a punitive damages award. In Stone, the trial court conditioned a denial of an insurer’s motion for new trial upon the insured’s agreement to a reduced award. Stone involved allegations of bad faith failure to pay actual cash value following a fire loss. The jury awarded $160,956.42 in economic damages, representing the difference between the amount actually paid to the insureds and the actual cash value determined. The jury then awarded $5,163,217.00 in punitive damages.25 Fidelity moved for a new trial. The trial court denied the motion upon the condition the insured accept the reduced punitive damages award of $1,600,000.00. The trial court entered a second judgment awarding the insureds $197,939.56 in economic damages (representing the difference between replacement cost value and the amount Fidelity actually paid), $1,600,000.00 in punitive damages, and attorneys fees and costs. Fidelity appealed both judgments and the appellate court granted in part and reversed in part.26 Fidelity argued that the award of $1,600,000.00 violated the due process clause of the United States Constitution.27 Once again, the California Second District Court of Appeals cited the Campbell factors and the reasoning utilized by the Simon court to quantify the “degree of reprehensibility” to justify the ratio of punitive damages to compensatory damages. The appellate court found two (2) of the reprehensibility factors present. The court found the conduct could be characterized as repeated rather than isolated because the insurer refused to properly investigate the nature of the insured’s losses for seven months, and knowingly used an inadequate estimate to calculate and pay actual cash value. Finally, the court held that the harm to the insured was not the result of a mere accident, but a conscious disregard for the rights of the insured.28
As in the Walker, the Stone decision contained a consideration for the inclusion of a punitive element in the compensatory damages. In determining whether the ratio between compensatory and punitive damages was appropriate, the court in Stone found the compensatory damages were purely economic and did not contain damages for emotional distress. In the Walker case, the court justified the lower 1 to 1 ratio of punitive damages to compensatory damages because it concluded the compensatory damages included a punitive element in the inclusion of emotional distress in the compensatory damages.29 The Stone court, following the reasoning in Simon, that “due process permits a higher ratio between punitive damages and a small compensatory award for purely economic damages,”30 found the 7 to 1 ratio between compensatory and punitive damages under its review was appropriate under due process standards, particularly compared to the 10 to 1 ratio approved in Simon.31
In Mississippi, the State Supreme Court in United American Ins. Co. v. Merril l32 painted the analysis with a wide brush that determined little more than an award not exceeding the 9 to 1 ratio applied in Campbell was acceptable. The decision evinces no particular consideration of the degree of reprehensibility. In Merrill, a life insurer’s failure to pay death benefits forced a 71 year old widow to take a night-shift job to repay the loan she had to secure in order to pay for her husband’s funeral expenses. The widow/beneficiary sued the insurer, the insurance agent and unnamed employees of the insurer.33 The agent answered and filed a cross-claim against the insurer alleging she at all times acted within the scope of her employment.34 A jury ultimately awarded compensatory damages in the amount of $500,000.00 to the beneficiary and $900,000.00 in punitive damages for bad faith.35 The jury further awarded $250,000.00 in compensatory damages to the agent, and $900,000.00 for punitive damages.36 The insurer, subsequently filed a motion for judgment notwithstanding the verdict or in the alternative, motions for new trial or remittitur.37 The trial court denied the motion for judgment notwithstanding the verdict and motion for new trial, but granted the remittitur regarding compensatory damages and punitive damages as to the beneficiary, and regarding punitive damages as to the agent.38
The trial court found the agent had failed to present any damages other than attorneys fees, which had been proven at $75,000.00. The court therefore reduced the compensatory award to the insurance agent, to $75,000.00. However, without more explanation, the trial court, citing to Campbell, determined that nine times the compensatory award was $675,000.00 and reduced the punitive damages award to this amount.39 As to the beneficiary, the trial court determined the compensatory damages award to be excessive and accordingly reduced it to $200,000.00. As it did with the award to the agent, the trial court looked to little more than the limits expressed in Campbell to declare that because the punitive damages award of $900,000.00 did not exceed nine times the compensatory damages award as determined by the jury, it would stand.40 The agent filed an affidavit of judgment satisfaction and dismissal with prejudice as to the agent was entered.41 Final judgment was entered in favor of the beneficiary for compensatory and punitive damages as well as attorneys fees and post-judgment interest and United appealed.42
The Merrill court noted the factors recognized by Mississippi law as governing the imposition of punitive damages as follows:
- The amount should punish the insurer and deter it from engaging in similar actions in the future.
- The amount should serve as a deterrent for others.
- The amount should account for the insurer’s financial worth.
- The amount should compensate the Plaintiff for her public service in holding the insurer accountable.43
The insured argued all four of these elements were presented and the Merrill court ultimately found because the punitive damages award was less than five times the amount of the compensatory award and less than one half of one percent of the insurer’s financial net worth, that the award was consistent with the holding in Campbell.44 Thus, focusing on Mississippi factors, the court conducted no analysis of the “degree of reprehensibility.” Instead, the Merrill court viewed the 9 to 1 Campbell ratio as a ceiling. Therefore, anything less than nine times compensatory damages awarded by the jury was constitutional, and would not be disturbed. As to the punitive damages award to the agent, the court approved the blanket application of a 9 to1 ratio without comment. The result is disparate, even when the ratio between the agent and the insured are compared within this single case. Here, where it appeared the court’s focus was on the ratio, rather than the “degree of reprehensibility,” the reviewing court upheld the punitive damages award to the insured because it was less than five times the amount of compensatory damages. However, when it came time to apply a ratio to the punitive damages award to the agent, the trial court, calculated it at nine times the compensatory award, the presumptive Campbell ceiling, where the only damages the agent proved were attorneys fees.
In another recent decision, the Federal Southern District of Mississippi addressed the question of the proper ratio of punitive damages to compensatory damages in a case involving the denial of a Hurricane Katrina claim in Broussard v. State Farm Fire and Casualty Company.45 There, the insurer relied upon its flood exclusion to deny the claim on a house that had been reduced to a slab.46 The jury verdict resulted in compensatory damages of $211,222.00 and punitive damages of $2,500,000.00. Upon review, without discussion of the degree of reprehensibility, the court determined this ratio of 12 to 1 was excessive. Citing to the single-digit multipliers language of Campbell, the court determined $1,000,000.00, which was between four and five times the contractual/compensatory damages was appropriate and entered remittitur to this amount.47 While not offering discussion as to how it arrived at this ratio, the Southern District of Mississippi appeared to recognize that Campbell offers something other than an outer limit on punitive damages by selecting a middle ground within the single-digit scale to find a multiplier of four or five more appropriate than the jury award.
In Nance v. Kentucky National Ins. Co.,48 the Fourth Circuit Court of Appeals sitting in West Virginia approved a far smaller ratio of 3.64 to 1 for seemingly more reprehensible behavior. In Nance, an injured truck driver was found not at fault for the jackknife of his rig. After treatment by over twenty (20) doctors, the truck driver was required to travel several hours for further medical examination at the request of the insurer. He was then required to travel over three hours to a mediation requested by the insurer where the insurer made no settlement offer.49 He and his wife were followed and videotaped by the insurer’s private investigator.50 During the course of the claim, the truck driver and his wife were required to deplete their personal savings and their son’s college savings, forced to mortgage their previously debt free home, and hold yard sales to raise to raise cash and sell vehicles and pets in order to pay for his medical expenses.51
According to the court, the insurer first asserted the brakes on the truck were defective, but later admitted it had no evidence to support that assertion.52 The insurer later attempted to allege that the insured was speeding until the truck’s onboard computer demonstrated otherwise.53 A few days before trial, the insured accepted the insurer’s settlement offer of $60,000.00 and later stated it was because he was down to $80.00 in his savings account and the insurer had “finally beat [him] down.”54 The jury awarded $150,000.00 for increased costs and expense; $100,000.00 for aggravation, inconvenience and annoyance; and $850,000.00 in punitive damages for a total award of $1,200,000.00, for which the district court entered judgment.55
Upon motion by the insurer, and with the agreement of the insured, the $150,000.00 award for increased costs and expenses was remitted to $33,000.00, for which the district court entered an amended judgment in the amount of $1,083,000.00 ($33,000.00 in compensatory damages and $850,000.00 in punitive damages).56
Upon review, the Fourth Circuit found that each of the factors for determining a high degree of reprehensibility were present: (1) the insurer’s actions in handling the claim were not limited to economic damages; (2) the tactics utilized by the insurer caused the insured emotional and mental stress that required medicinal treatment; (3) the tortious conduct of the insurer evinced reckless disregard for the emotional and mental health of the insured and his wife; (4) the insured and his wife were financially vulnerable; (5) the record reflected repeated actions of intentional malice by the insurer.57 The Fourth Circuit therefore concluded the ratio of 3.64 to 1 was not excessive, especially in light of other cases awarding 10 to 1 ratios.58
The insurer argued in determining the ratio by comparing the compensatory damages to the amount of punitive damages, only the $33,000.00 figure for out-of-pocket expenses could be considered, arguing that the remaining $200,000.00 of the compensatory award contained damages duplicated in the punitive damages award.59 The Fourth Circuit rejected this argument based upon the standards set by Campbell. It determined the award for emotional distress and the award for aggravation, inconvenience and annoyance were intended to compensate harm proximately caused by the insurer’s conduct and actually suffered by the insured, as opposed to the punitive damages which were ‘aimed at deterrence and retribution.’60
Unlike the California Second District Court of Appeal in Walker, the Nance court did not consider the compensatory award for emotional distress to add an element of punitive damages to the compensatory damages in determining the appropriate amount for punitive damages. However, comparatively, this conduct, which led to the determination of a “high degree of reprehensibility” still resulted in a ratio half that found in the Stone case where only two (2) reprehensibility factors were noted.61
In the case of Zimmer v. Travelers Ins. Co.,62 a “bad-faith” action arising from a workers compensation claim, the Southern District of Iowa most recently evaluated the “degree of reprehensibility” and disparity between the harm or potential harm suffered by plaintiff and the amount of actual damages, guideposts established by Gore and followed by Campbell. Upon Travelers’ Renewed Motion for Judgment as a Matter of Law, Motion for New Trial or Remittitur and Motion to Alter or Amend Judgment,63 the court reviewed Travelers’ argument that the punitive damages award against it was excessive. Noting the guideposts for determining the appropriateness of a jury’s punitive damages award, the court looked to the five (5) Campbell factors for the determination of the “degree of reprehensibility” for application to the facts of the case.64
Reviewing each of the factors, the court determined that at least two of those factors weighed in favor of the Plaintiff. Specifically, the court advised the intentional failure to evaluate the Plaintiff’s claim in accordance with reasonable claims handling practices evinced an indifference to, or reckless disregard for the health and welfare of the Plaintiff.65 Because the Defendants knew the Plaintiff was injured and unable to work, the court found they had reason to know he was financially vulnerable.66 In addition, the court found the Plaintiff produced evidence that the conduct was not isolated as to him, i.e. the Defendants acted in bad faith as to the Plaintiff on more than one occasion.67
Recognizing the Campbell Court’s limitation to single digit ratios between compensatory and punitive damages, and the indication by the Supreme Court in Pacific Mutual Life Insurance Company v. Haslip that a 4 to 1 ratio was “‘close to the line’ of constitutional impropriety,” the court noted the ultimate punitive damage award was only slightly more than one-tenth of the compensatory damage award.68 Again, as compared to the Stone case, where the court also found only two reprehensibility factors weighed in favor of that plaintiff, but justified a 7 to 1 ratio, the ratio applied here in the Zimmer case, was significantly lower. As we look back upon these recent decisions regarding punitive damage awards in insurance “bad-faith” cases, it is difficult to see any particular pattern emerging. What constitutes facts that predict any specific number along the presumptive scale of one (1) to nine (9) times the compensatory damages as dictated by Campbell varies from case to case. As presented in the foregoing cases, while the factors for determining the “degree of reprehensibility” are presumably the same, the ultimate justification for the ratio to compensatory damages appears purely subjective. The only factor that appears with any repetition is the relationship of the number of Campbell “degree of reprehensibility” factors to the finding of a higher level of reprehensibility. What punitive damage ratio ultimately results from the “higher level of reprehensibility” is anyone’s guess.