High Court Tosses Excessive AwardWashington

A United States Supreme Court decision overturning a $145million punitive damage award against State Farm will go a long waytoward reining in runaway legal judgments, tort reform and industryrepresentatives say.

“The Supreme Court recognized some time ago that punitivedamages had run wild in this country,” according to nationallyknown tort expert Victor Schwartz, who is general counsel for theWashington-based American Tort Reform Association.

“Now, it has provided a decision with teeth that will curb thisfundamental violation of due process that has been imposed on manyunpopular defendants over the past decade,” Mr. Schwartz said.

The decision in the case of State Farm v. Campbell heldthat a $145 million punitive damage award in a Utah case in whichcompensatory damages were assessed at $1 million was excessive andviolated the Due Process Clause of the 14th Amendment.

In issuing its 6-3 opinion, the high court noted that thepunitive damage award was calculated, in part, by presentingevidence of alleged misconduct by State Farm in other states, eventhough State Farms actions may have been legal in the states wherethey occurred.

However, the Supreme Court said, a state cannot punish adefendant for conduct that is legal where it occurred.

“A basic principle of federalism is that each state may make itsown reasoned judgment about what conduct is permitted or proscribedwithin its borders, and each state alone can determine what measureof punishment, if any, to impose on a defendant who acts within itsjurisdiction,” the court said in a opinion written by JusticeAnthony M. Kennedy.

Moreover, the court said, many of these acts bore norelationship to the those at issue in the case. “A defendantsdissimilar acts, independent from the acts upon which liability waspremised, may not serve as the basis for punitive damages,” thecourt said.

“A defendant should be punished for the conduct that harmed theplaintiff, not for being an unsavory individual or business,” thecourt added.

Mr. Schwartz said the decision makes clear that punitive damagesshould focus on the wrongful conduct of the particular plaintiff,not a “broad dragnet sweep” of the defendants out-of-stateconduct.

Insurance groups also hailed the decision. Peter Bisbecos,legislative and regulatory counsel for the Indianapolis-basedNational Association of Mutual Insurance Companies, said thedecision shows that juries have an important but limited role inpunishing specific wrongs.

“We believe this decision will return a measure of fairness toour civil justice system, Mr. Bisbecos said.

Monika McGuire, assistant general counsel with the Des Plaines,Ill.-based National Association of Independent Insurers, said thehigh court “rang the tort reform victory bell” by saying thatfairness and reasonableness need to be the priorities in awardingpunitive damages.

David Snyder, general counsel with the Washington-based AmericanInsurance Association, said that the decision draws clear standardsfor the types of evidence that may be admitted to determinepunitive damages. This holding on the standards of evidence, hesaid, makes this case “very significant.”

Joyce Kraeger, an attorney with the Downers Grove, Ill.-basedAlliance of American Insurers, said that the decision is also avictory for state regulation.

By considering out-of-state conduct in its punitive damageaward, the Utah court usurped the authority of state insuranceregulation. If allowed to stand, she said, the case would havetransformed the role of a jury from that of being a fact finder ina particular dispute into a national regulator of insurance.

In the State Farm case, the Bloomington, Ill.-basedcompany was sued for alleged fraud and intentional infliction ofemotional distress resulting from an auto insurance claim.

During the trial, the plaintiff was allowed to present evidenceof a so-called “national scheme” on the part of State Farm to capclaims payments and meet corporate goals. Partly on the basis ofthis evidence, detailing practices that occurred over a 20-yearperiod, the company was hit with a $145 million punitive damagejudgment.

The Supreme Court noted that in previous cases, it has outlineda three-part guidepost to determine the constitutionality ofpunitive damage awards.

The three factors are the degree of reprehensibility of thedefendants conduct, the disparity between the harm and the award,and the difference between the award and criminal penalties imposedin comparable cases.

Regarding the first factor, the high court said the $145 millionfigure was based on out-of-state conduct that had no relationshipto the auto claim at hand.

As for the second part, the disparity between the award and theharm, the court noted that the punitive damage award was 145 timesthe amount awarded for compensatory damages.

The court said that while it did not want to establish aconcrete limit on the ratio between the award and the harm, inpractice a “single digit” ratio will satisfy due process.

The presumption against the constitutionality of a 145-to-1ratio is “substantial,” the court said.

Finally, as to the third guidepost, the court noted that themost relevant civil sanction under Utah law for an act of grandfraud is $10,000, which is dwarfed by the $145 million punitivedamage award.

The court said that rather than $145 million, a punitive damageaward at or near the compensatory figure of $1 million would likelybe justified.

Reproduced from National Underwriter Edition, April 14, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.