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Fairness doctrine: a Supreme Court decision tackling exorbitant jury awards is welcome news for insurers.

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For years, "tort reform" has been a buzzword in political campaigns, and punitive damages have been discussed frequently.

In 2001, according to The National Law Journal, the median ratio of punitive to compensatory damages was 3-to-l: it jumped to 4.4-to-1 in 2002. But then. in 2003, the year of an important U.S. Supreme Court decision on punitive damages, the ratio plummeted to 1.6-to-1. and further dropped to 0.7-to-1 in 2004.

The decrease in punitive damages awards beginning in 2003 indicates that juries may have been exercising restraint. But why?

Punitive "damages, which are non-compensatory damages levied against tortfeasors, punish outrageous conduct and aim to deter similar conduct in the future. In its 2003 ruling in State Farm Mutual Automobile Insurance Co. v. Campbell, the Supreme Court joined the discussion of "excessive" punitive damages and held that such damages generally cannot exceed compensatory damages by more than a single-digit ratio.

Based on The National Law Journal's annual review of the 100 largest jury verdicts, Campbell appears to have had a substantial effect on juries' determinations of the amount of punitive damages. Cornell School of Law professor Theodore Eisenberg argues that the decrease in the punitive-to-compensatory-damages ratio is a reflection of this landmark decision's influence. And the U.S. Chamber of Commerce has collected data showing that punitive-to-compensatory damage ratios have decreased since Campbell.

To understand Campbell, it is important to also understand its 1996 predecessor, BMW of North America Inc. v. Gore. In Gore, the Supreme Court held that, in recognition of the Fourteenth Amendment's substantive due process requirement, the size of a punitive damages award requires restriction.

In this case, the defendant, Gore, claimed that BMW had repainted his car to cover damage. At trial, BMW admitted that its policy was to not disclose presale repairs costing less than 3% of a car's retail price. Because the paint job to Gore's car was less than this threshold, neither the dealer nor Gore was informed of the damage. The jury decided that BMW acted with "gross, oppressive or malicious fraud" and awarded Gore $4,000 in compensatory damages--and $4 million in punitive damages.

BMW appealed, contending that the 1,000-to-1 ratio of punitive to compensatory damages violated due process. On appeal, the Alabama Supreme Court upheld the ruling, but cut the punitive damages award to $2 million.

Although the U.S. Supreme Court's ruling in Gore failed to define a "bright line" ratio between punitive and compensatory damages, it enunciated guideposts to determine the constitutionality of punitive damages awards.

Three Guideposts from Gore

The first guidepost is the reprehensibility of the defendant's conduct. Five "aggravating factors" indicate reprehensibility: whether the harm is physical rather than economic; whether there is reckless disregard for the health or safety of others; whether the victim is financially vulnerable; whether the conduct is repetitious; and whether there exists intentional malice, trickery or deceit. The Court found no reprehensible conduct by BMW.

The second Gore guidepost is the disparity between the plaintiff's harm, or potential harm, and the punitive damages award. Refusing to adopt a "simple mathematical formula," the Court relied more on common sense and determined that 500-to-1 was "breathtaking."

The third Gore guidepost is the difference between the amount of punitive damages awarded and the potential statutory sanctions that could be imposed. Noting that the maximum penalty for deceptive practices reaches only $10,000 across the nation, the Court found "no basis for assuming that a more modest sanction would not have been sufficient to motivate full compliance with the disclosure requirement." The decision of the Alabama Supreme Court was reversed, and that court was instructed to redetermine damages consistent with Gore.

Given the highly subjective standards announced in Gore, the Campbell decision brought a welcome quantitative standard for determining punitive damage awards.

State Farm v. Campbell

In 1981, Curtis Campbell attempted to pass six vehicles on a Utah highway. Approaching from the opposite direction, Todd Ospital swerved onto the shoulder of the road and died in a collision with another vehicle driven by Robert Slusher, who was permanently disabled. Campbell and his spouse were unharmed.

In the course of investigating the ensuing wrongful death and tort claims, early consensus was reached regarding Campbell's unsafe passing as the cause. However, Campbell's insurer, State Farm, contested liability.

Almost inexplicably, State Farm rejected offers by Ospital's estate and Slusher to settle the claims for Campbell's policy limit of $50,000 ($25,000 per claimant). The Court noted that State Farm representatives assured the Campbell's that "their assets were safe, that they had no liability for the accident, that [State Farm] would represent their interests and that they did not need to procure separate counsel."

At trial, the jury found Campbell 100% at fault and awarded the plaintiffs $185,849, an amount in excess of the $50,000 offered in settlement. Because State Farm contributed only the policy limit of $50,000, Campbell was obligated to pay the remaining $135,849 owed on the judgment.

The facts in Campbell make clear that, after the jury's decision, State Farm's counsel told Campbell, "You may want to put 'for sale' signs on your property to get things moving."

Campbell appealed, hiring his own counsel. During the appeal, Campbell entered into an agreement with Slusher and Ospital's estate pursuant to which both plaintiffs agreed not to seek satisfaction of their judgments against Campbell; in return, he agreed to sue State Farm for bad faith and be represented by attorneys for Slusher and Ospital's estate--with 90% of any verdict obtained against State Farm going to Slusher and Ospital's estate.

The Utah Supreme Court denied Campbell's appeal. State Farm then paid Slusher and Ospital's estate the total judgment of $185,849. Campbell nonetheless filed a complaint against State Farm in Utah state court alleging "bad faith, fraud, and intentional infliction of emotional distress" for contesting liability and placing his assets as policyholder at risk.

In the had-faith trial, the jury determined that State Farm's decision not to settle was unreasonable because of the likelihood of an excess verdict. Campbell introduced evidence that State Farm's decision was a result of a "national scheme to meet corporate fiscal goals by capping payouts on claims companywide." The jury awarded Campbell $2.6 million in compensatory damages and $145 million in punitive damages.

The trial court reduced the compensatory damages award to $1 million and the primitive damages award to $25 million. On appeal, the Utah Supreme Court reinstated the $145 million punitive damages award.

Analyzing the Ruling

State Farm appealed. In a 6-3 decision, the U.S. Supreme Court held that an award of $145 million in a case awarding $1 million in compensatory damages violates the due process clause. The Court's majority described their decision as "neither close nor difficult."

Regarding the degree of reprehensibility of the defendant's misconduct (Gore's first guidepost), the Court held that the five previously described "aggravating factors" need not all be present to demonstrate reprehensibility; but the absence of these factors makes reprehensibility "suspect."

Although reprehensibility was suspect--Campbell's harm was economic in nature and not in disregard for the health or safety of others--it is arguably trickery or deceit to inform financially vulnerable policyholders that their assets would be safe, and then state that their house would need to be sold to pay a judgment.

The Court focused on Campbell's argument that State Farm's recidivism was evidence of reprehensibility. However, many of State Farm's allegedly deceptive insurance practices that Campbell presented at trial were legal in the states in which they occurred. Therefore, they could not be included in determining punishment. Further, the Court held that the conduct used to suggest recidivism "bore no relation" to the conduct that harmed the Campbells.

The second Gore guidepost considers disparity between actual or potential harm suffered by the plaintiff and the punitive damages award. Despite being reluctant to set a definitive standard, the Court held in Campbell that straying above a single-digit (less than 10-to-l) ratio between punitive and compensatory damages will generally violate due process.

Emphasizing that "courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered," the Court stated that "we have no doubt that there is a presumption against an award that has a 145-to-1 ratio."

The third Gore guidepost analyzes the difference between punitive damages awarded by the jury and penalties authorized by statutes in similar cases. The Court noted that the most relevant civil sanction under Utah law for the wrong transgressed against Campbell--a S 10,000 fine for grand fraud--is a sum obviously "dwarfed" by $145 million. The Court reversed the judgment of the Utah Supreme Court, with instructions that the Utah courts determine the "proper calculation of punitive damages under the principles we have discussed."

On its second review of the case, the Utah Supreme Court lowered the punitive damages award to $9 million. The U.S. Supreme Court rejected State Farm's subsequent request for a rehearing.

Insurance and Campbell

Campbell, considered a huge win for insurance interests concerned with costly judgments, continues to have a significant effect on the insurance industry.

Excessive punitive damage awards hurt the ability of the U.S. economy and judicial system to function. Ultimately, consumers bear the costs to which insurance companies are exposed. Excessive punitive damage awards lead to higher prices for all policyholders.

The Campbell Court cited Gore and stated that "the wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award." Reducing the significance of the defendant's financial condition in the analysis of punitive damages promises to have dramatic consequences.

Awarding punitive damages proportionate to compensatory damages, regardless of a defendant's financial status, was followed in the more recent decision of Exxon Shipping Co. v. Baker, part of the Exxon Valdez oil spill case. Although the Exxon case awarded punitive and compensatory damages in a 1-to-1 ratio, it is distinguishable because it was decided trader federal maritime laws, thus sending an important signal.

Campbell provides defense lawyers with a proverbial light at the end of the punitive damages tunnel. The Gore guideposts continue to serve as a sobriety test for any impassioned jury ready to dole out excessive punitive damages at the ultimate cost to consumers. Campbell gives the American legal system a flexible and long-awaited standard for calculating these damages.

* The Background: Insurers were bearing the brunt of excessive awards for punitive damages.

* The News: A key Supreme Court ruling in 2003 placed more reasonable limits on jury decisions.

* The Way Ahead: The Court ruling appears to be a major step forward for tort reform.

Contributors: Jerry Furniss and Jack Morton are professors of business law at the University of Montana Business School Furniss can be reached at jerry.furniss@business.umt. edu.Morton can be reached at jack. morton@business.umt.edu.

Michael Harrington is an associate dean at the University of Montana Business School He can be reached at michael.harrington@business.umt.edu.
Median Ratios of Punitive/
Compensatory Damages

2002 (pre-Campbell) 4.4:1
2003 (Campbell decided on April 7) 1.6:1
2004 (post-Campbell) 0.7:1

Source: National Law Journal
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Title Annotation:Regulatory/Law: Tort Reform
Author:Furniss, Jerry; Harrington, Michael; Morton, Jack
Publication:Best's Review
Geographic Code:1USA
Date:May 1, 2009
Words:1865
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