Top Court To Review Punitive Damages

By Steven Brostoff, Washington Editor

NU Online News Service, June 27, 10:57 a.m. EST, Washington?The U.S. Supreme Court has agreed to review the constitutionality of a $145 million punitive damage award assessed against State Farm.

In State Farm v. Campbell, the Bloomington, Ill.-based insurer is seeking to overturn a Utah Supreme Court decision imposing the award for allegedly handling a claim in bad faith and for intentional infliction of emotional distress.

The U.S. Supreme Court has addressed the issue of punitive damages several times. In a series of cases, the high court said that there are constitutional limits to punitive damages, but it has never presented a formula for determining those limits.

In State Farm v. Campbell, a State Farm policyholder, Curtis B. Campbell, was involved in an auto accident that killed one person and disabled another.

According to the opinion filed by the Utah Supreme Court, State Farm collected evidence that Mr. Campbell was at fault for the accident. Nonetheless, State Farm declined to settle. The court said State Farm's attorney assured Mr. Campbell that he would represent his interests, that his assets were safe, and that he need not hire his own attorney.

The case against Mr. Campbell went to trial, and the jury found him 100 percent liable. The jury awarded the other parties damages that exceeded Mr. Campbell's policy limits. The Utah court said that State Farm's attorney told Mr. Campbell and his wife that they should put "for sale" signs on their property.

Subsequently, Mr. Campbell entered into an agreement with the other parties to the accident under which Mr. Campbell would pursue a bad faith action against State Farm, subject to certain conditions, and the other parties would agree not demand that Mr. Campbell pay his obligations.

Several years later, after the liability judgment against Mr. Campbell was affirmed on appeal, State Farm paid all the damages arising from the accident--both its policy limits and the excess.

Mr. Campbell then filed the action against State Farm that led to the punitive damage award, charging that its actions were in bad faith and caused him emotional distress. State Farm argued that its decision not to settle the accident was an "honest mistake" that did not justify punitive damages.

Mr. Campbell, however, charged that State Farm's decision was part of a "national scheme" designed to meet corporate fiscal goals by capping payouts.

The jury ultimately awarded Mr. Campbell $2.6 million in compensatory damages and $145 million in punitive damages. The trial judge later reduced the punitive award to $25 million.

Both State Farm and Mr. Campbell appealed to the Utah Supreme Court. State Farm argued that the $25 million punitive damage award was excessive. Mr. Campbell, on the other hand, argued that the trial judge erred in reducing the award, and asked the Utah Supreme Court to reinstate the $145 million judgment. The Utah Supreme Court ruled in favor of Mr. Campbell, and reinstated the higher award.

During the Utah Supreme Court proceeding, State Farm argued that the punitive damage judgment was excessive on several fronts. State Farm said:

? First, that the award is more than triple the actual damages--a ratio that is seldom upheld by Utah courts.

? Second, that the size of the award violates the constraints articulated by the U.S. Supreme Court, which has suggested a three-part analytical test to determine constitutionality.

(The three-part test is the degree of reprehensibility of the conduct, the disparity between the harm suffered and the punitive damage award, and the difference between the award and the civil or criminal penalties imposed in comparable cases.)

? Third, that the Utah court erred by allowing Mr. Campbell to present evidence of a "national scheme." State Farm said allowing this evidence violated the Utah Rules of Evidence because it had nothing to do with the company's conduct towards Mr. Campbell.

The Utah Supreme Court rejected all of State Farm's arguments.

Looking specifically at the U.S. Supreme Court's test for analyzing punitive damage awards, the Utah court said that the $145 million award satisfies it.

First, the court said, a high award is justified under the standard assessing the disparity between the harm suffered and the award, because State Farm's "fraudulent conduct has been a consistent way of doing business for the last 20 years."

The likelihood of further misconduct is high, the court said, and the effect on Mr. and Mrs. Campbell was severe, since they had to live in constant fear of financial ruin.

As for the comparison between the award and civil or criminal penalties authorized in comparable cases, the Utah court said that imprisonment is possible for the alleged conduct. That, the court said, is a strong indication that the conduct warrants high punitive damages..

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