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How to manage the risk of punitive damages: companies that manage punitive damages as a separate category of risk are frequently better able to limit their exposures.

Despite a recent U.S. Supreme Court decision, punitive damage awards continue to make headlines as juries grant colossal amounts to plaintiffs.

It's become so bad that companies need a clear-cut strategy to contain these runaway jury verdicts. With annual punitive awards now totaling in the billions of dollars, companies must take steps to mitigate these punitive damage risks. Punitive damages should be managed as a distinct risk, just as asbestos, pollution and other serious risks are managed separately.

As with any risk, the process of containing a punitive damage risk begins with identifying the potential problems.

Identifying Four Factors

There are four factors for identifying potentially significant punitive damage claims.

The first factor is serious injury to the claimant. In addition to severe physical injuries, care should be taken to identify claims involving injuries to reputation as well as substantiated psychological or emotional injuries.

The second factor, bad conduct, includes both the conduct leading up to the claimant's injuries, as well as conduct after the injury. While post-incident conduct tends to be ignored because it is inadmissible to prove liability, post-incident conduct may be used to mitigate punitive damages. Evidence concerning post-incident conduct often means the difference between a small punitive damage verdict and a runaway award.

Jurisdiction is the third factor. Certain jurisdictions are notorious for large and frequent punitive damage verdicts. Ten notorious jurisdictions are Alabama, Arkansas, California, Florida, Georgia, certain counties in Illinois, Louisiana, Mississippi, Ohio, and some counties in Texas. In addition, Midwestern jurisdictions often are dangerous. While juries in the Midwest tend to be reluctant to find for plaintiffs, when these juries find that a defendant has acted wrongfully, they do not hesitate to punish vengefully.

The fourth factor is dangerous plaintiff's counsel. Obviously, plaintiff's lawyers who already have gained a reputation for attaining large verdicts may be dangerous. Additionally, plaintiff's lawyers who have yet to develop a reputation, but work a case tenaciously also may be dangerous. Either the tenacious plaintiff's lawyer may use the case being evaluated to make a reputation, or the tenacious plaintiff's lawyer may retain a well-known plaintiff's lawyer for trial.

When a punitive damage claim presents one of these four core factors, the claim should be reviewed periodically so that it does not develop into a serious claim. If two factors are present, special handling of the claim is warranted.

For most companies, a program to mitigate punitive damage risk needs someone within the company to take the lead in managing punitive damages. This designated leader should report periodically on the containment efforts undertaken by the company to senior management. The claims handler responsible for any potentially significant punitive damage claim should report periodically on the claim to the punitive damages leader. Outside counsel also should report periodically concerning punitive damage containment efforts. Comprehensive reports also should be prepared summarizing the progress on each punitive damage claim. These punitive damage risk management reports will provide senior management with confidence that the company is taking the steps needed to contain punitive damage risks, while also ensuring that adequate resources are allocated to protect the company from a potentially devastating punitive damage verdict.

Managing a Serious Claim

Once a serious punitive damage claim is identified, special care is needed to contain the punitive damage risk. If a claim presents a potentially significant punitive damage exposure, early settlement efforts are warranted. If the case cannot reasonably be settled early on, then resources must be committed to ensure the development of an effective punitive damages defense. Where appropriate, summary judgment that punitive damages cannot be assessed should be sought immediately. Pretrial motions to try the case in multiple phases and to limit presentation of certain adverse evidence should be made, including federal constitutional challenges to the evidence. Care should be taken to proffer jury instructions that comply with the company's due process rights, especially in jurisdictions in which punitive damage jury instructions provide little guidance to a jury. If the court does not grant the company's trial phasing motion, then witnesses should be prepared to proffer their testimony outside of the hearing of the jury in order to make a record for appeal.

If a potentially serious punitive damage claim is not settled before trial, steps should be taken to obtain daily trial transcripts so that post-verdict motions and appellate arguments may commence during the trial. This is very important, because many jurisdictions allow as few as 10 days to file post-verdict motions. Post-verdict motions constitute the last opportunity to expand the record for appeal. Thus, any mitigating evidence that was not presented at trial must be included in the post-verdict motions.

Finance and Media Strategy

Before trying a potentially significant punitive damage claim, steps should also be taken to ensure that an appeal bond would be posted if an adverse verdict were rendered. Companies have been bankrupted by clearly unconstitutional punitive damage verdicts because the companies were not able to post an appeal bond.

Most jurisdictions require a bond of 125 percent to 150 percent of the verdict amount to stay execution of the judgment while an appeal is taken. Bonding agents generally will not provide a bond for any amount exceeding six times the company's cash flow and typically will not consider available insurance in determining the company's cash flow. Depending on the company's cash flow compared with the amount of punitive and compensatory damages sought by the plaintiff, the availability of a bond for a potentially adverse verdict is a risk that should be evaluated in determining whether to settle a case before going to trial.

It is also recommended that a media package be prepared in case of an adverse verdict. By having a media plan, companies will be in a better position to avoid the risk of an executive, angered by the unfair verdict, making an inappropriate statement to the media. The media package generally should include a written statement by the company and a single company contact for comment. It is also useful to have a company representative prepared to speak with regulators and rating agencies to explain the impact of the verdict on the company.

Punitive damages continue to present significant exposures. Runaway verdicts are increasing, and smaller, yet significant, punitive damage awards have become frequent. Companies that manage punitive damages as a separate category of risk increase their ability to manage and contain their exposure to punitive damages. By identifying potentially serious punitive damage exposures early, companies increase the likelihood that these cases will be settled on reasonable terms in advance of trial.

When significant exposure cases are not amenable to settlement, companies must ensure that a focused punitive damages defense is prepared and presented on the record. As a result, the punitive damage claim may be dismissed as a matter of law through summary judgment, directed verdict or judgment as a matter of law. If a punitive damage verdict is entered, the company will be confident that an appropriate and detailed record has been made on evidentiary and constitutional issues so that an appeal is likely to succeed.

Punitive Verdicts on the Rise, Despite 'Favorable' Campbell Decision

The risk presented by punitive damages has increased. Research of reported punitive damage verdicts indicates that, until the 1990s, large punitive damage verdicts were unusual. Overall, the punitive damage risk was severe but infrequent. For example, a study of product liability cases Filed in the mid-1980s disclosed that only 35 percent sought punitive damages. As a result, few companies faced punitive damages with sufficient frequency and severity to warrant management of their punitive damage risks.

Recently, punitive damages verdicts have been assessed in record amounts. The number of punitive damage verdicts of $100 million or more doubled from 1993 TO 1996, and doubled again from 1996 to 2001. In a single year, more than $162 billion in reported punitive damage verdicts was assessed at trial or affirmed on appeal. While $145 billion of that amount is attributable to a single case, the remaining $17 billion indicates that punitive damages have become a significant risk.

Courts Unable to Contain Damages

Early U.S. decisions adopted the concept of punitive damages from English law. Once the concept was adopted, the Supreme Court did not meaningfully address punitive damages until the 1970s, when it limited the availability of punitive damages in defamation cases to protect free speech.

The free speech decisions laid a foundation for more aggressive challenges to punitive damages, beginning with Aetna Life Ins. Co. vs. Lavoie in 1986. In 1994, the courts first limited punitive damages on due process grounds. Subsequently, a 1996 case established substantive due process limits on punitive damages and required judges to determine excessiveness based on three guideposts. In 2001, the court held that post-verdict excessiveness review is conducted de nova, and deference to the jury's determination of the amount of punitive damages is permitted. The court's most recent decision in Campbell vs. State Farm Mutual Auto Insurance Association shows the Supreme Court's increasing frustration with runaway punitive damages.

In the wake of the Campbell case, risk managers, insurers and reinsurers have been inundated with reports discussing the benefits of this favorable punitive damages decision.

The Campbell case signals that, while the court continues to provide defendants with tools to combat punitive damages, reliance on these tools alone is not enough to contain punitive damages. Instead, companies should manage their punitive damage risks, just as they manage other categories of risk. The Campbell decision has created new battle-grounds for punitive damage cases. As long as runaway punitive damage verdicts continue to survive trial and appellate court scrutiny, the Supreme Court is likely to continue hearing a punitive damage case every year.

Lori S. Nugent is chairwoman of the Punitive Damage Practice Group with the Philadelphia law firm of Cozen O'Connor
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Copyright 2003 Gale, Cengage Learning. All rights reserved.

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Title Annotation:risk primer
Author:Nugent, Lori S.
Publication:Risk & Insurance
Date:Sep 1, 2003
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