High court rules on punitive damages.

Twice during 2003, the U.S. Supreme Court sent a clear message to lower courts handing out massive punitive damage awards: Such large judgments are unconstitutional, and they'll be struck down. That's a huge benefit to insurance companies trying to assess future risks.

The first ruling came in April, when the justices ruled in favor of State Farm Insurance in a Utah case, Campbell vs. State Farm, and said there must be limits to the amount of punitive damages a jury can award. Justice Anthony M. Kennedy suggested a "single-digit" standard, in which punitive awards--damages levied in order to punish a defendant--should be no more than 10 times the award for actual damages, in most cases. The second case, Philip Morris vs. Williams, which overturned a large judgment against Philip Morris, came in October. That ruling was seen as a signal that the court was going to stay on track with the award limits, insurance industry observers said.

"The court has made it clear that it is standing firm on the standard it set down," said David F. Snyder, vice president and assistant general counsel for the American Insurance Association.

In the first case, the Utah Supreme Court found that State Farm "repeatedly and deliberately deceived and cheated its customers" and upheld a punitive-damages award that was 145 times the amount of compensatory damages. The U.S. Supreme Court in April found that the sheer size of the award violated the due-process clause of the 14th Amendment, and it struck the judgment down.

In the case against Philip Morris, jurors in Oregon had awarded $79.5 million to the family of a janitor who smoked Marlboros for 40 years. His family was awarded $800,000 in compensatory damages. The trial judge reduced the $79.5 million award to $32 million, but an Oregon appellate court later reinstated the whole amount. The U.S. Supreme Court on Oct. 6 overturned that judgment.

Compensatory awards are supposed to pay plaintiffs back for actual, measurable losses such as medical bills and lost wages. Punitive damages are intended to punish companies and act as a deterrent to corporate wrongdoing. Over the past 10 years, however, there has been a steep increase in the amounts juries have been levying against corporate defendants. Lawyers often cited two standouts: a 1993 ruling in the case of TXO Production Co. vs. Alliances Resources, in which the U.S. Supreme Court upheld a punitive-damages award 526 times the actual damages, and a 1996 case, BMW of North America Inc vs. Gore, in which the punitive award was 500 times the compensatory award.

The U.S. Supreme Court eventually overturned the award in the BMW case, providing three guidelines for determining whether punitive awards are excessive: the reprehensibility of the defendant's conduct; whether there is a "reasonable ratio" between punitive and compensatory awards; and a comparison of the punitive damages with the civil or criminal penalties that could be imposed for the same acts.

With the October ruling, the court further clarified that punitive awards can't be out of hand, said the AIA's Snyder. "What this means is that exposure is much more reasonable and risk management is made much more predictable," Snyder said.