In an Insurance Bad Faith Case, Attorneys’ Fees are “Compensatory Damages” That can Increase a Punitive Damages Award

In 2003, the United States Supreme Court decision State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003) that generally limited punitive damages suffered by a plaintiff.  Since then, California courts have stated generally that a 10-1 ratio of punitive damages to compensatory damages may be the legal limit based on the due-process clause, although some California courts have allowed a higher ratio.  Given that limitation, plaintiff’s attorneys and defense counsel have waged many battles regarding what constitutes compensatory damages and can be counted when calculating the maximum amount of punitive damages that can be awarded.  In Nickerson v. Stonebridge Life Insurance Company, 203 Cal. Rptr. 3d 23 (2016), the California Supreme Court awarded a victory for plaintiffs by ruling that Brandt fees (that is, attorneys’ fees incurred by the policyholder in establishing coverage under the policy when there is also bad faith) determined after a jury verdict by stipulation or by the court are considered compensatory damages for purposes of calculating the ratio of punitive damages to compensatory damages.

The amount of Brandt fees due to a plaintiff following a determination that an insurer acted in bad faith can be set by a jury.  However, due to the confusing nature of presenting the issue of attorneys’ fees to a jury, especially given that the facts are completely unrelated to underlying dispute, many parties agree to have issue of Brandt fees decided by the Court, or by stipulation, following the jury’s verdict.  Unfortunately for plaintiffs who were able to prove that the insurance company acted in bad faith, that led to a situation where Brandt fees were not being counted when determining the maximum amount of punitive damages a plaintiff could receive.

In Nickerson, after the jury’s verdict, the parties stipulated to the amount of Brandt fees, but the defendant appealed the large punitive damages award.  The Court of Appeal, in reducing the punitive damages award, ruled that Brandt fees awarded after the jury verdict must be excluded from the calculation in determining whether, and to what extent, the jury‘s punitive damages award exceeds constitutional limits.  The California Supreme Court ruled that the Court of Appeal erred in excluding Brandt fees from that analysis and that “Brandt fees may be included in the calculation of the ratio of punitive to compensatory damages, regardless of whether the fees are awarded by the trier of fact as part of its verdict or are determined by the trial court after the verdict has been rendered.”

Thus, while the punitive damages award initially awarded by the jury was reduced in accordance with State Farm, Nickerson is a victory for plaintiffs as it adds another measure of damages that can be used to support a larger punitive damages award.

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