High Court limits punitive damages in an appeal of State Farm decision. (Briefing).

A new ruling by the U.S. supreme Court could lead to significantly smaller punitive-damage settlements across the country, exactly what liability tort reform has been attempting to achieve for years.

The April 7 decision by the Supreme Court held that an award of punitive damages in a case against State Farm of 145 times the amount of compensatory damages was unreasonable and violated the due process clause of the 14th Amendment, according to the decision of the court.

According to the Supreme Court's decision, the due process clause prohibits "the imposition of grossly excessive or arbitrary punishments."

The U.S. Supreme Court decision resulted from a State Farm appeal of a Utah Supreme Court decision in Campbell vs. State Farm that hit the insurer with punitive damages. In October 2001, the Utah court reinstated a jury award of $145 million against State Farm, finding that the insurer "repeatedly and deliberately deceived and cheated its customers" in the way it handled auto insurance claims.

Argument before the U.S. Supreme Court began Dec. 11 with State Farm's position that the $145 million jury award was out of proportion with what is permitted by due process. "According to case law, this ratio would exceed significantly the limits permitted by the due process clauses of the U.S. Constitution," State Farm said in a position paper.

The case involved an accident in which a State Farm insured, Curtis Campbell, was accused of making an unsafe pass that caused two other cars to collide, killing one of the other drivers. Campbell maintained his innocence, and State Farm defended him in court. A jury found Campbell to be liable for the accident. He sued State Farm for bad faith, saying State Farm should have settled the case before it went to trial. State Farm paid the entire amount of damages awarded. However, Campbell's bad-faith lawsuit against State Farm, which was filed in 1989, continued on to the Utah's highest court.

Much of the focus of the Campbell case was on State Farm's out-of-state claims process, which was introduced as evidence of improper activity on the part of State Farm. The U.S. Supreme Court said in its decision that the Utah court's action awarded punitive damage to punish and deter conduct that bore no relation to Campbell's harm. Due process "does not permit courts to adjudicate the merits of other parties' hypothetical claims under the guise of the reprehensibility analysis," the court said.

According to its brief, State Farm processed more than 29,000 third-party bodily injury claims against its insureds in Utah. In that time period, Campbell's was the only case in which the defendant was exposed to a possible jury award in excess of policy limits because State Farm refused to settle within policy limits. "To transform this single instance of conduct into a springboard for huge punitive damages, plaintiffs, over State Farm's constitutional and evidentiary objections, were allowed to present to the jury massive amounts of evidence of out-of-state and dissimilar conduct," State Farm said in its brief.

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Source: National Law Journal and VerdictSearch