Limitations on Punitive Damages
When a lawyer asks for punitive damages against an insurer for bad faith conduct he or she will always ask the jury to “teach the insurer a lesson” to stop it from doing the same to others. The argument has been successful in thousands of bad faith suits brought from California to Florida and from Texas to Wyoming. The United States Supreme Court has weakened, if not destroyed, that argument in Philip Morris USA, v. Williams, Personal Representative of Estate of Williams, Deceased, on Certiorari to the Supreme Court of Oregon, No. 05-1256 decided February 20, 2007. The plaintiff’s lawyer convinced the jury to award $79.5 million in punitive damages with a similar argument when he asked the jury to:
[t]hink about how many other Jesse Williams in the last 40 years in the State of Oregon there have been. … In Oregon, how many people do we see outside, driving home … smoking cigarettes? … [C]igarettes … are going to kill ten [of every hundred].
This is the same argument made by insurance bad faith lawyers – that the insurance company (like the tobacco companies) is hurting everyone they insure and must be punished sufficiently to protect the world of insurance buyers:
Think about how many other John Smith’s in Oregon have had their claims wrongfully denied. How many people do we see outside, driving home, whose financial lives were destroyed by ABC Insurance Company not living up to its promises.
The U.S. Supreme Court has put a stop to that practice. Juries can no longer be confused. They must be cautioned that no matter how awful they think the insurers actions were the punishment they can impose is limited to a consideration of the harm done to the plaintiff alone. This ability to punish is also limited by the Supreme Court’s findings in State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408, 416 where due process is limited to a single digit multiplier of compensatory damages.
In the Phillip Morris case a jury found that Jesse Williams’ died because he smoked cigarettes manufactured by Philip Morris who knowingly and falsely led him to believe that smoking was safe. The jury awarded the estate $821,000 in compensatory damages for deceit and $79.5 million in punitive damages, The Oregon Supreme Court rejected Philip Morris’ arguments that the trial court should have instructed the jury that it could not punish Philip Morris for injury to persons not before the court, and that the roughly 100-to-1 ratio the $79.5 million award bore to the compensatory damages amount indicated a ”grossly excessive” punitive award.
The US Supreme Court, perhaps because of errors made in the trial court, reversed and remanded the case back to Oregon because the “punitive damages award based in part on a jury’s desire to punish a defendant for harming nonparties amounts to a taking of property from the defendant without due process.” It did not rule on the 100-to-1 ratio of punitive damages to compensatory damages because it was not necessary to reach that point.
The Supreme Court has ruled in the past that the Constitution imposes certain limits, in respect both to procedures for awarding punitive damages and to amounts forbidden as ”grossly excessive.” (Honda Motor Co. v. Oberg, 512 U.S. 415, 432 (1994); Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443 (2001); BMW of North America, Inc. v. Gore, 517 U.S. 559, 568; and Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443.
In a decision made by the bare majority of the court with Justice Bryer writing for the majority stated the rule:
“In our view, the Constitution’s Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties or those whom they directly represent…”
The Due Process Clause prohibits a State from punishing an individual without first providing that individual with the ability to present all available defenses. A defendant, like an insurer, faced threatened with punishment for injuring nonparty victims who have the right to bring their own individual suits is unable to defend against the charge since it cannot bring in evidence of its proper claims handling with regard to the unnamed and unknown victims. As Justice Bryer pointed out doing so would establish a “near standardless dimension to the punitive damages…” calculations of the jury.
Noting that the Supreme Court could find no authority supporting the use of punitive damages awards for the purpose of punishing a defendant for harming others the court also recognized that evidence of actual harm to nonparties can help show that the conduct also posed a substantial risk of harm to the general public, and so was particularly reprehensible.
The Oregon Supreme Court was unable to formulate a method by which evidence of reprehensibility could be admitted and still protect against a violation of the defendant’s due process right to not be punished for harm done to nonparties. Justice Bryer concluded that Oregon’s Supreme Court was wrong, such a method can be formulated:
In particular, we believe that where the risk of that misunderstanding is a significant one-because, for instance, of the sort of evidence that was introduced at trial or the kinds of argument the plaintiff made to the jury-a court, upon request, must protect against that risk. Although the States have some flexibility to determine what kind of procedures they will implement, federal constitutional law obligates them to provide some form of protection in appropriate cases.
[W]e remand this case so that the Oregon Supreme Court can apply the standard we have set forth. Because the application of this standard may lead to the need for a new trial, or a change in the level of the punitive damages award, we shall not consider whether the award is constitutionally ”grossly excessive.” We vacate the Oregon Supreme Court’s judgment and remand the case for further proceedings not inconsistent with this opinion.
The insurer faced with an argument that the jury teach a lesson to the insurer must demand that the court protect against the risk of a misunderstanding and make it clear that punishment can only be directed at the damages caused to the plaintiff and require the court to advise the jury that it cannot seek to punish Philip Morris for injury to other persons not before the court.
(c) 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012”; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.