Supreme Court Hears State Farm On Punitives

Washington

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

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

The Supreme Court has addressed the issue of punitive damages several times, ruling that there are constitutional limits to punitive damage awards. However, the high court has never clarified what those limits are.

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

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

In one case, BMW v. Gore, the court presented a three-part test aimed at determining the constitutionality of punitive damage awards.

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

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

But in the State Farm case, he said, the size of the award was determined partly because the trial court allowed the plaintiff to present evidence of alleged bad conduct that was not directly related to the plaintiffs claims. This evidence involved situations occurring in other states and other lines of insurance that had little or no connection to the plaintiffs claims, he said.

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

Lori S. Nugent, who heads the Punitive Damages Practice Area in the Chicago office of Cozen, OConnor, agreed. The question, she said, is whether the state involved in the State Farm case, which is Utah, has the right to punish the company for outside conduct.

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

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

The State Farm case involves a policyholder named Curtis B. Campbell who 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, but nonetheless declined to settle.

The case went to trial and Mr. Campbell was found 100 percent liable for the accident. He was hit with a judgment that exceeded his policy limits.

According to the Utah Supreme Court, State Farms attorney told Mr. Campbell and his wife to put a “for sale” sign on their property.

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

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

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

However, the trial court allowed Mr. Campbell to present evidence 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 compensatory damages and $145 million in punitive damages.

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

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

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

The question, Ms. Lorber said, is whether plaintiffs can have it both ways, that is, punish defendants multiple times for conduct in different states, and at the same time seek huge awards in a single action 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 same conduct.

During the oral argument, Ms. Lorber noted, the Supreme Court discussed the issue extensively. In particular, she said, Justice Anthony M. Kennedy asked Harvard Law Professor Lawrence Tribe, who presented arguments for Mr. Campbell, how he would handle the issue of multiple awards.

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

That, Ms. Lorber said, is a surprising concession from a lawyer who 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Supreme Court Hears State Farm On Punitives

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