California Court of Appeals Fixes Punitive Damage Ratio and Bad Faith Cases

On Behalf of | Sep 29, 2017 | Bad Faith, Insurance Law

Historically the United States Supreme Court has admonished trial courts with the high court’s observation that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” State Farm Mut Automobile Ins. Co. v. Campbell, 538 U.S. 408, 424 (2003). The California Supreme Court has taken a different view of what the proper ratio of punitive to compensatory damages should be. In Simon v. Sao Paolo U.S. Holding, Inc.. 35 Cal. 4th 1159 (2005) the California Supreme Court upheld a ten-to-one ratio. The California Supreme Court observed that the one-to-one ratio of the Campbell decision would not be applied, with the court suggesting that a ratio of nine or ten-to-one would be the point in California where a punitive damage award became constitutionally suspect and required special justification. Simon, 35 Cal. 4th at 1182.

In Nickerson v. Stone Bridge Life Ins. Co., 219 Cal.App.4th 188 (2013) the California Court of Appeals upheld a ten-to-one ratio for insurance bad faith cases.

The Nickerson case involved a plaintiff who was a disabled veteran confined to a wheelchair due to a spinal cord injury. While the plaintiff was being lowered from a transport van he fell to the pavement, breaking his leg. He was then taken to the Veterans Administration Hospital. The plaintiff spent 109 days in the VA Hospital. The insurance company used a medical peer review organization to determine the medical necessity and reasonableness of the treatment that was rendered. The medical peer reviewer determined that plaintiff no longer needed “acute” care after 19 days, at which time the plaintiff should have been transferred to a “more economical and medically appropriate facility.” The conclusion was reached notwithstanding the fact that the cost of care at the VA was free for veterans. The insurer paid benefits for the first 19 days in the hospital, but denied the benefits for the remaining 90 days based on the reviewer’s findings. Plaintiff then sued and the court entered a directed verdict for plaintiff in the amount of $31,500 in unpaid benefits on the breach of contract claim. A jury found in favor of plaintiff on the bad faith claim and awarded $35,000 in emotional distress damages and $19 million in punitive damages.

The trial court conditionally granted a new trial unless the plaintiff accepted a reduction in the punitive damage award to $350,000, which was ten times the bad faith damages. Plaintiff refused to accept the reduced award and appealed.

On appeal the court determined that Brandt fees should be included in the compensatory damages side of the ratio and then modified the judgment to allow punitive damages in the amount of $425,000.

In focusing on the ratio guidepost of compensatory to punitive damages, the California Court of Appeals found that the message gleaned from the United States Supreme Court and California Supreme Court decisions was that the due process analysis was flexible and that the constitutionality of an award of punitive damages depended upon the facts and circumstances of each particular case.