Supreme Court Hears State Farm On Punitives

Washington

The United States Supreme Court last week heard oral argumentsin a case that tort reform advocates hope will begin reining inlarge punitive damage awards.

The case, State Farm Mutual v. Campbell, involves a$145 million punitive damage award assessed against theBloomington, Ill.-based company for alleged bad faith claimhandling and intentional infliction of emotional distress.

The Supreme Court has addressed the issue of punitive damagesseveral times, ruling that there are constitutional limits topunitive damage awards. However, the high court has never clarifiedwhat those limits are.

Mark Behrens, a tort law expert in the Washington office ofShook, Hardy & Bacon, said that the State Farm casegives the high court an opportunity to address the issue ofpunitive damages from a different angle than past cases.

Mr. Behrens noted that while the court has said in previouscases that there are limits to punitive damages, the court hasstruggled with finding a means to rein them in.

In one case, BMW v. Gore, the court presented athree-part test aimed at determining the constitutionality ofpunitive damage awards.

The three-part test is the degree of reprehensibility of theconduct, the disparity between the harm suffered and the award, andthe difference between the award and civil or criminal penaltiesimposed in comparable cases.

Mr. Behrens said lower courts have applied the three-part testin a way that upholds large awards.

But in the State Farm case, he said, the size of theaward was determined partly because the trial court allowed theplaintiff to present evidence of alleged bad conduct that was notdirectly related to the plaintiffs claims. This evidence involvedsituations occurring in other states and other lines of insurancethat had little or no connection to the plaintiffs claims, hesaid.

The court could begin placing restraints on punitive damageawards, Mr. Behrens said, by limiting the types of evidence thatcan be presented in these cases.

Lori S. Nugent, who heads the Punitive Damages Practice Area inthe Chicago office of Cozen, OConnor, agreed. The question, shesaid, is whether the state involved in the State Farmcase, which is Utah, has the right to punish the company foroutside conduct.

She noted that an important aspect of the case is that theplaintiff claimed that he was the victim of a “national scheme”perpetrated by State Farm.

Ms. Nugent noted that some $162 billion in punitive damages wereawarded by courts in 2001.

The State Farm case involves a policyholder namedCurtis B. Campbell who was involved in an auto accident that killedone person and disabled another.

According to the opinion filed by the Utah Supreme Court, StateFarm collected evidence that Mr. Campbell was at fault for theaccident, but nonetheless declined to settle.

The case went to trial and Mr. Campbell was found 100 percentliable for the accident. He was hit with a judgment that exceededhis policy limits.

According to the Utah Supreme Court, State Farms attorney toldMr. Campbell and his wife to put a “for sale” sign on theirproperty.

But after several years of court proceedings, State Farm paidall the damages arising from the accident, including both thepolicy limits and the excess.

Mr. Campbell eventually filed the lawsuit against State Farm,charging bad faith and intentional infliction of emotionaldistress.

The case went to trial and State Farm said the decision not tosettle the accident was an “honest mistake.”

However, the trial court allowed Mr. Campbell to presentevidence that the company was involved in a “national scheme”designed to meet corporate fiscal goals by limiting payouts.

The jury awarded Mr. Campbell $2.6 million in compensatorydamages and $145 million in punitive damages.

During the oral argument last week, Leah Lorber, an attorneywith Shook, Hardy & Bacon, said one of the most interestingpoints of discussion was the “two worlds of punitive damages”colliding.

On the one hand Ms. Lorber said, there is the issue of multiplepunitive damage awards, in which defendants are hit with liabilityfor the same conduct in different states.

On the other hand, she said, there are cases in which defendantsare subject to huge awards based on alleged misconduct around thecountry.

The question, Ms. Lorber said, is whether plaintiffs can have itboth ways, that is, punish defendants multiple times for conduct indifferent states, and at the same time seek huge awards in a singleaction that takes into account conduct in other states.

This, she noted gives rise to the issue of “double jeopardy,”meaning that defendants are punished multiple times for the sameconduct.

During the oral argument, Ms. Lorber noted, the Supreme Courtdiscussed the issue extensively. In particular, she said, JusticeAnthony M. Kennedy asked Harvard Law Professor Lawrence Tribe, whopresented arguments for Mr. Campbell, how he would handle the issueof multiple awards.

She said that Mr. Tribe replied that there could be a discountin punitive awards for amounts already paid.

That, Ms. Lorber said, is a surprising concession from a lawyerwho usually represents plaintiffs.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 16, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.