California Court of Appeals Decision Provides Reasoning Behind Punitive Damages Calculations

In a case where the punitive damages awarded to a health insurance claimant amounted to more than $19 million in 2011, a California Court of Appeals has ruled the verdict was excessive, capping the permissible award at $350,000.

According to Royal Oakes,a partner at the Los Angeles law firm of Barger Wolen, who succinctly summarized this case in a March 21, 2011 blog:

The underlying case involved the plaintiff, an ex-Marine, who sought payment for 109 days in the hospital after a fall. The insurance company believed expenses for only 19 of those days were medically necessary. A jury awarded Nickerson $35,000 in emotional distress damages, plus $19 million in punitive damages.

The defendant, Stonebridge Life Insurance, filed a motion to set aside the judgment arguing the punitive damages awarded were excessive. The motion was denied although a conditional trial was offered. If the plaintiff wanted to avoid a new trial he could do so by accepting a reduction of the punitive damages award to $350,000.

The way in which punitive damages were calculated varied in past cases.

“For years the appellate courts have been trying to interpret the various pronouncements by the U.S. Supreme Court about the issue of the size of punitive damages and specifically, the ratio of punitive damages to compensatory damages. The reason it has been a bit of a struggle on occasion is because of the high court and the appellate courts, in general, are not prepared to impose a strict bright line test, limiting punitive damages to a single digit ratio. Having said that, this new case is one of many cases that have come very close to seeing that, in the absence of exceptionally reprehensible conduct, then it is a due process violation to exceed a ratio of 9 or 10 to 1. In fact, many appellate courts have suggested that far smaller ratios are appropriate in virtually all cases,” Oakes said.

The Barger and Wolen partner thinks the impact of this particular decision is significant to insurers because it doesn’t include breach of contract damages.

“The significance of this decision is to reinforce the idea that though evidence of reprehensible conduct may have been found by a jury; nonetheless, it is almost impossible for an appellate court to find that a ratio of more than 10 to 1 between punitives and the compensatory damages satisfies constitutional due process requirements. There’s another very significant and separate aspect to this decision. When you figure out how much compensatory damages exist in order to come up with the punitives to compensatory ratio, do you have to decide what components of damages should be included in compensatory damages? This new Nickerson case reaffirms the idea that in computing compensatory damages, you do not include breach of contract damages. Instead, you only include damages for torts, such as bad faith and emotional distress,” said Oakes.

In Nickerson, the jury awarded damages for emotional distress and breach of contract; however, breach of contract damages were not included in the punitive damages calculation.

“The court decided that determining the amount of compensatory damages for purposes of computing a ratio between punitive and compensatory, you do not include the breach of contract damages. The reason for that is that punitive damages relate to tortuous conduct. You don’t get punitive for a breach of contract. You might get punitive for tort, depending on the tort and depending on whether the punitive damage standard is met, such as malice, oppression or fraud. And so, this case is an important reminder that in computing compensatory damages for purposes of arriving at a ratio between punitives and compensatory you exclude breach of contract damages and you include tort damages,” Oakes said.

Generally, if a contract is breached it and the breaching party is sued then the damages are limited to contractual damages.

“However, years ago, the courts decided that because of the special relationship between a policy holder and an insurance company that if a policyholder is suing for breach of contract and can also go beyond that and prove additional conduct such as bad faith or emotional distress then the policy holder is entitled to try to assert those causes of action,” said Oakes.

The court of appealsreferenced past cases where there were some guideposts often used as guidance for calculating punitive damages calculations in California.

“The United States Supreme Court over the last 20 years or so has issued a handful of guidepost decisions. These decisions generally recognize that there have to be restrictions on the jury’s award of punitive damages. The decisions acknowledge that it’s a due process violation under the U.S. constitution for a jury to be able to award unlimited punitive damages. And so, the challenge has been to determine from Campbell and BMW and other high court cases just what the limitation on punitive damages should be. As the law has evolved, the appellate courts have recognized that not only is a single digit ratio of punitive to compensatory, the upper end of a possible ratio in the vast majority of cases a much smaller ratio is probably appropriate,” Oakes said.

According to Oakes,there have been several decisions that have come close to saying it’s a due process violation to exceed the ratio of 9 or 10 to 1.

“I think that we have been moving in the direction of a bright line test limiting punitive damages to a single digit ratio. It may be that because every case is different and you occasionally see cases that suggest an extreme level of reprehensibility, there will continue to be a reluctance to impose a bright line test,” said Oakes.

The case is Nickerson v. Stonebridge Life Ins. Co., Los Angeles County Superior Court No. BC405280