Utah Ruling Turns Juries Into Regulators, Insurers Contend

Washington

State regulation of insurance would be effectively undermined if a $145 million punitive damage award against State Farm is allowed to stand, four major property-casualty trade associations told the United States Supreme Court.

In a brief filed with the high court in the case of State Farm v. Campbell, the associations said that unless the award is overturned, a single jury in any state could become, in effect, a national insurance regulator.

“A state may not extend its insurance regulatory power extraterritorially to reach conduct occurring outside its boundaries,” the associations said in their brief.

The brief was filed jointly by the Des Plaines, Ill.-based National Association of Independent Insurers, the Indianapolis-based National Association of Mutual Insurance Companies, the Washington-based American Insurance Association, and the Downers Grove, Ill.-based Alliance of American Insurers.

The issue involves a $145 million punitive damage award against the Bloomington, Ill.-based State Farm for alleged bad faith claim handling and intentional infliction of emotional distress.

The plaintiffs in the case, a State Farm policyholder named Curtis B. Campbell and his wife Inez, charged that State Farm exercised bad faith by refusing to settle claims arising from an automobile accident for which Mr. Campbell was subsequently found to be 100 percent liable.

The jury awarded the other parties to the accident damages that exceeded Mr. Campbells policy limits.

Although State Farm ultimately paid all the damages from the accident, including the excess, Mr. Campbell sued the company for bad faith for its decision not to settle.

Mr. Campbell charged during the trial that State Farms decision was part of a “national scheme” designed to meet corporate fiscal goals by capping payouts.

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

The trial court judge reduced the punitive award to $25 million, but the $145 million figure was reinstated by the Utah Supreme Court.

During the Utah Supreme Court proceeding, State Farm argued that the trial court erred in allowing Mr. Campbell to present evidence of a so-called “national scheme.” State Farm said allowing this evidence violated the Utah Rules of Evidence because it had nothing to do with the companys conduct towards Mr. Campbell.

However, the Utah Supreme Court rejected State Farms argument. It justified the $145 million award, charging, among other things, that State Farms “fraudulent conduct has been a consistent way of doing business for the last 20 years.”

In their brief to the U.S. Supreme Court, the insurance trade associations argue that the Utah Supreme Court, by allowing the disputed evidence, transformed the jury from a factfinder in a particular case into a national regulator of insurance.

The jury award, the brief says, is based on a nationwide spectrum of dissimilar “other act” evidence that has no causal relationship to the plaintiffs injury.

“The Utah courts have thus created a process that impermissibly infringes on the regulation of the business of insurance by the several states,” the brief says.

In exercising their insurance regulatory powers, the brief says, states make individual and sometimes very different decisions as to what types of insurance practices should be prohibited or permitted.

“The Utah jury has superseded these state-by-state judgments by conducting a national review of a wide variety of State Farms underwriting, coverage and claims handling practices, and then, without any instruction on the law of other jurisdictions, awarding punitive damages based on the jurors disapproval of those practices, without any formal determination of their legality,” the brief says.

Many of these practices, the brief says, are plainly lawful and even encouraged in the states where they occurred.

The Utah courts, in effect, granted the jury the authority to conduct a nationwide compliance audit of business practices, the brief says.

This, the brief adds, exceeds the institutional competence of the jury.

The Supreme Court will hear the case during its upcoming 2002-2003 term.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Utah Ruling Turns Juries Into Regulators, Insurers Contend

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