Steven Plitt, Expert Witness Steven Plitt, Expert Witness
Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

THE CALIFORNIA COURT OF APPEALS FINDS THAT A 10:1 RATIO OF COMPENSATORY DAMAGES TO PUNITIVE DAMAGES IS APPROPRIATE IN AN INSURANCE BAD FAITH CASE AND THAT THE RATIO SHOULD BE NO HIGHER

In Nickerson v. Stonebridge Life Ins. Co., 5 Cal.App.5th 1, 209 Cal.Rptr.3d 690 (2nd Dist. 2016), the California Court of Appeals recently reduced a $19M punitive damages award in an insurance bad faith case to $475,000 applying a 10:1 ratio of compensatory damages to punitive damages.

This case focused on Brandt fees under California law. As a result of an underlying bad faith trial, the trial court entered a directed verdict for the plaintiff in the amount of $31,500 in unpaid benefits on the plaintiff's breach of contract claim. A jury found in favor of the plaintiff on the bad faith claim and awarded $35,000 in emotional distress damages and $19M in punitive damages. At trial, neither party presented evidence to the jury on the attorney's fees plaintiff incurred in recovering contract damages. Under California law, such fees are recoverable as an element of compensatory damages for insurer bad faith, i.e., Brandt fees.

After the jury awarded $19M in punitive damages, the trial court conditionally granted a new trial unless the plaintiff would accept a remittitur of the punitive damage award to $350,000. The $350,000 was 10x the bad faith damages which was the maximum that the trial court believed would pass constitutional boundaries. In calculating the 10:1 ratio, the trial court included in the compensatory damages denominator only the $35,000 in emotional distress damages awarded on the bad faith claim and rejected plaintiff's contention that the denominator should also include $31,500 in damages for the insurer's breach of contract and/or the $12,500 in Brandt fees.

On appeal, the California Court of Appeals held that Brandt fees should be included in the compensatory damages side of the ratio and, therefore, modified the judgment to allow punitive damages in the amount of $425,000. In doing so, the California Court of Appeals applied the three guideposts established by the United States Supreme Court in Campbell and Gore. Although the Court found under the reprehensibility element and given the insurance company's net worth, the higher ratio of 10:1 was needed to deter similar conduct in the future, the Court, nevertheless, determined that its authority to award more in punitive damages was "constrained by case law and the Constitution." As such, the Court took a narrow view of the damages that could be included in the compensatory damages denominator. Plaintiff argued that the "uncompensated potential harm" should be included but the Court rejected this noting that the plaintiff was fully compensated for his emotional distress injuries. The Court also excluded the $31,500 in policy benefits awarded to the plaintiff finding that punitive damages were not authorized in contract actions.

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