Punitive Damages Archives - Page 2 of 3

California Court of Appeal Finds That a 10:1 Ratio Between Punitive Damages and Compensatory Damages Awards Satisfies Due Process

A 10-to-1 ratio of punitive damages to compensatory damages awards in an insurance bad faith case passes Constitutional muster. So says the California Court of Appeal in its decision in Nickerson v. Stonebridge Life Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 583 (2013). The decision is significant in that it affirms that punitive damages are not limited to a single-digit ratio and that a ratio of punitive to compensatory damages of 10-to-1, and perhaps higher, falls within the maximum permitted under due process. Additionally, the decision clarifies what damages may be included in fixing the ratio of compensatory to punitive damages.

The Nickerson case concerns a disabled veteran, Nickerson, who was covered under a policy providing coverage for hospital confinement, intensive care unit and emergency room visits issued by Stonebridge. After suffering an injury to his leg, Nickerson was hospitalized for over 100 days. However, Stonebridge contended that only a small portion of the time Nickerson stayed in the hospital was considered “Necessary Treatment” under his policy. On this basis, Stonebridge denied benefits for the rest of the time Nickerson was hospitalized.

Following the denial of his benefits under the policy, Nickerson filed a claim against Stonebridge for breach of the insurance contract and for breach of the implied covenant of good faith and fair dealing. The trial court found that Nickerson was entitled to $31, 500 in unpaid benefits for the breach of contract cause of action. The jury returned a special verdict finding Stonebridge’s failure to pay policy benefits was unreasonable and that Nickerson suffered $35,000 in damages for emotional distress. Finally, the jury awarded Nickerson $19 million in punitive damages, which constituted 5% of Stonebridge’s net worth. Stonebridge immediately moved for a motion for new trial seeking to reduce the punitive damages award. The trial court conditionally granted a new trial unless Nickerson agreed to accept a reduction of the punitive damage award to 10 to 1 in accordance with “recent California and federal authority.” In calculating the amount of punitive damages, the trial court only included the $35,000 in compensatory damages for bad faith and did not include damages for the insurer’s breach of contract or the $12, 500 in attorney’ fees awarded to Nickerson pursuant to Brandt v. Superior Court, 37 Cal. 3d 813, 817 (1985) (when the defendant insurer’s tortious conduct forces insured to retain counsel to obtain policy benefits, the insurer is liable for attorney’s fees). Thus, the trial court offered Nickerson a reduction of punitive damages to $350,000.

Nickerson rejected the trial court’s offer and appealed, arguing that the trial court erred (1) in concluding it was constrained by law to limit punitive damages to no more than 10 times the compensatory award; and (2) in excluding certain categories of compensatory damages.

The Court of Appeal began its analysis by reciting that a punitive damages award violates the due process clause of the Fourteenth Amendment if the award is “grossly excessive.” In determining whether the trial court’s remittance of the jury’s award of punitive damages to a 10-to-1 ratio with compensatory damages was constitutional, the court followed the three guideposts set out in BMW of North America, Incorporated v. Gore, 517 U.S. 559, 575 (1996): (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. As to the first guidepost, the court found that the degree of reprehensibility factor weighs in favor of Nickerson because, although Nickerson did not suffer physical harm, Stonebridge acted with indifference toward Nickerson’s health and safety, Nickerson was a financially vulnerable individual, Stonebridge’s conduct was intentionally deceitful and was not an isolated incident. The court did not consider the third guide post relating to comparable civil penalties because Nickerson conceded that this guide post was of “limited utility.” Turning to the second and most important guidepost, the court noted that the Supreme Court has consistently refused to establish a ratio beyond which a punitive damage award could not exceed, but that awards significantly exceeding a single-digit ratio between punitive and compensatory damages generally will not satisfy due process. The court then stated that the California Supreme Court has found that ratios significantly greater than 9 or 10-to-1 are suspect and may not pass constitutional muster absent “special justification.” Based on both federal and state case law, the court concluded that the message gleaned from these cases is that due process analysis is flexible and the constitutionality of any award must be based upon the particular facts and circumstances of the case.

Based on its analysis of the three guideposts, the circumstances of this case, the high level of reprehensibility of Stonebridge’s conduct, Stonebridge’s net worth and the small economic damage award justifies an outside constitutional limit of a 10-to-1 ratio of punitive to compensatory damages. As such, the Court of Appeal upheld the trial court’s decision to remit the jury’s award to a 10-to-1 ratio.

Additionally, it is important to note that the court also addressed what categories of compensatory damages are included in calculating the ratio of punitive to compensatory damages. Nickerson argued that “uncompensated potential harm” should be included into the calculation. However, the court rejected this argument because Nickerson was fully compensated for his emotional distress injuries. The court also refused to include the $31, 500 in policy benefits awarded to Nickerson because, citing Major v. Western Home Insurance Company, 169 Cal. App. 4th 1197, 1224 (2009), punitive damages are not authorized in contract actions. The court also refused to include attorney’s fees awarded pursuant to Brandt because they were awarded after the jury awarded punitive damages. However, it should be noted that if the jury had awarded attorney’s fees, they would have been considered in determining if the ratio of punitive damages to compensatory damages is excessive because Brandt fees “are considered extra contractual tort damages that compensate a plaintiff for an insurer’s bad faith refusal to pay policy benefits.” Id (emphasis in original).

The Nickerson decision is highly significant in that the Court of Appeal made it clear that punitive damages awards are not limited to a single-digit ratio and that there is no bright line maximum ratio of punitive damages to compensatory damages required by due process. Although the court strongly suggested that a punitive damage award significantly exceeding a 9 or 10-to-1 ratio could violate due process, the court refused set the 10 to 1 ratio as a maximum cap on all punitive damages awards. Indeed, given the highly flexible due process analysis adopted by the court, instances where insurers engage in significantly reprehensible acts of bad faith, as determined under the guidepost analysis, may well justify a punitive to compensatory damages ratio which exceeds the 10-to-1 ratio applied in Nickerson.

Court Approval is Not Needed to Assert a Punitive Damages Claim Against a Health Care Service Plan

In a victory for health insurance policy holders over health insurers/health care service plans, in Kaiser Foundation Health Plan, Inc, v. Superior Court (Rahm, et al, Real Parties), 2012 Cal. App. LEXIS 138 (Cal. App. 2d Dist. Feb. 15, 2012), the Court of Appeals ruled that a plaintiff does not need to obtain approval from the trial court before asserting a claim for punitive damages against a health care service plan. Specifically, the Court ruled that California Civil Procedure section 425.13 applies only to health care providers (such as doctors), but does not apply to health care service plans such as Kaiser Foundation Health Plan or Anthem/Blue Cross.

The Rahm family filed a lawsuit against Kaiser Foundation Health Plan and two Kaiser health care providers. The Rahms claimed that Kaiser improperly delayed before ordering an MRI for their daughter Anna, resulting in the eventual loss of Anna’s right leg and portions of her pelvis and spine. Specifically, despite numerous requests by Anna’s parents that Kaiser authorize an MRI for Anna, Kaiser refused. As a result, there was a considerable delay in discovering that Anna was suffering from a “high grade” osteosarcoma, one of the fastest growing types of osteosarcoma. The delay significantly contributed to Anna’s poor prognosis and the need for the amputations.

After the Rahms filed their lawsuit, the defendants filed a motion to strike the punitive damages allegations. The defendants asserted that the Rahms failed to comply with California Civil Procedure section 425.13, which requires a plaintiff to obtain a trial court order before a claim for punitive damages can be asserted against a health care provider for damages arising out of professional negligence. The Rahms eventually dismissed their punitive damages claims against the two Kaiser health care providers. Accordingly, the Court only reviewed whether California Civil Procedure section 425.13 applied to claims against health care service plans.

The Court of Appeals indicated that “the text of the statute is unclear as to whether section 425.13 is intended to apply only to claims against health care providers, or whether it is intended to apply to claims against any type of defendant—including claims against health care service plans,” and thus turned to the legislative history. After reviewing the legislative history, as well as Central Pathology Service Medical Clinic, Inc. v. Superior Court, 3 Cal. 4th 181 (1992) in which the California Supreme Court considered the scope of claims subject to section 425.13, the Court held that section 425.13 does not apply to claims against health care service plans. Specifically, the Court noted that:

Defendants’ argument that section 425.13 may be applied to claims against health care service plans, rather than health care providers, is also in conflict with other sections of California code. Civil Code section 3428, subdivision (c) states that “[h]ealth care service plans … are not health care providers under any provision of law, including, but not limited to … Section[] … 425.13 … of the Code of Civil Procedure.” Likewise, Health and Safety Code section 1367.01, subdivision (m) clarifies that a health care service plan’s role in determining the medical necessity of a requested procedure “shall [not] cause a health care service plan to be defined as a health care provider for purposes of any provision of law, including … Section[] … 425.13 … of the Code of Civil Procedure.” The language of these statutes demonstrates a clear intent to exclude health care service plans from the procedures required under section 425.13.

Defendants have not cited a single decision that has applied section 425.13 to claims pleaded against a health care service plan or any other type of entity that was not a medical care provider.

In conclusion, the Court ruled that:

The legislative history of section 425.13 and various provisions in California code demonstrate that the procedural requirements described in the statute do not apply to claims against health care service plans. Because defendants admit that Kaiser Health Plan is a health care service plan, rather than a health care provider, the trial court did not err in refusing to strike the punitive damages allegations asserted against the Health Plan.

Based on this ruling, plaintiffs can assert punitive damage claims against health care service plan without first obtaining court approval and will therefore have an easier time holding entities such as Kaiser Foundation Health Plan or Anthem/Blue Cross liable for their actions.

California Courts Rule Punitive Damages Award of 16 to 1 Ratio Not Unconstitutionally Excessive.

In a somewhat surprising recent decision, the California Court of Appeal upheld a punitive damages award that carried a ratio of more than 16 to 1 based on the compensatory damages awarded by the jury. The ruling was surprising considering the United States Supreme Courts’ recent holding that “grossly excessive” punitive damages awards offend due process under the Fourteenth Amendment, and stating that “in practice, 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, 425 (2003). California courts have once again sent a clear message of willingness to uphold just punitive damages awards under appropriate circumstances, applying a balancing test as opposed to a bright line ratio approach.

The court in Bullock v. Philip Morris USA, Inc., 2011 Cal. App. LEXIS 1081 (Cal. App. 2d Dist., 2011), affirmed an award of $13.8 million in punitive damages and $850,000 in compensatory damages against cigarette manufacturer Philip Morris. The court discussed the impact of the due process limitation on punitive damages, and analyzed the award in the context of the three guideposts for determining whether a punitive damages award is excessive under State Farm: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Bullock v. Philip Morris USA, 2011 Cal. App. Lexis 1081, *22-23 (quoting State Farm, supra, 538 U.S. at 418.) The court also took into consideration the defendant’s financial condition, which has previously been recognized by California courts as a permissible consideration under the due process clause as necessary to further the state’s legitimate interests in punishment and deterrence. Id. at 22 (citing Simon v. San Paolo U.S. Holding Co., Inc., 35 Cal.4th 1159, 1185–1186 (2005).) After balancing the competing interests as to each factor, the court concluded that the award was justified, but cautioned slightly against use of this holding to establish a presumption of appropriateness for other cases:

We believe that the extreme reprehensibility of Philip Morris’s misconduct, including the vast scale and profitability of its course of misconduct, and its financial condition justify the $13.8 million punitive damages award against Philip Morris. Our conclusion is the same regardless of whether the ratio of 16 to one can be said to significantly exceed a single-digit ratio, so we need not decide that question. We do not mean to suggest that 16 to one would be an appropriate ratio in another case involving extreme reprehensibility or to establish any kind of presumption, but merely conclude, based on the facts in this case, that the $13.8 million punitive damages award is reasonable, not arbitrary, and does not offend due process. Id. at 58.

However, in a footnote, the court noted that “‘[T]he presumption of unconstitutionality applies only to awards exceeding the single-digit level ‘to a significant degree.’ (State Farm, supra, 538 U.S. at p. 425.)’” (Simon, supra, 35 Cal.4th at p. 1182, fn. 7.) Thus, the court sent a clear message that it did not believe that a 16 to 1 ratio exceeded the single-digit level to a significant degree, and left the door open for other California courts to allow punitive damages awards above the single-digit ratio.

Insurers Cannot Escape Bad Faith Liability By Relying On In-House Experts And The “Genuine Dispute Doctrine”

Insurers often wrongfully deny policy benefits to their insureds in situations where there may be some uncertainty as to coverage. Despite an overarching duty to act reasonably and find in favor of coverage in such situations, insurers often will deny coverage and rely on their in-house medical experts’ (i.e., nurses, doctors) analysis and opinions as a basis for denial. In such situations, the insurer denies coverage at its peril.

California courts have consistently held that where there is a “genuine dispute” as to coverage, an insurer cannot be held liable for bad faith – this is known as the “genuine dispute doctrine.” However, an insurer’s reliance on the genuine dispute doctrine is often misplaced and misguided, and regularly results in substantial damages awards for plaintiffs for bad faith denial of coverage. California courts have routinely held that an insurer cannot “create” a genuine dispute to absolve itself from bad faith liability by relying on in-house experts. Instead, the courts have created an affirmative duty in such a situation to employ independent medical experts before making a coverage decision.

The recent decision of the District Court, Southern District of California in Barbour v. UNUM Life Ins. Co., 2011 U.S. Dist. LEXIS 91060 (S.D. Cal. 2011), is a primary example of how an insurer’s misuse of in-house experts and its reliance on the “genuine dispute doctrine” can result in potential bad faith liability, as well as punitive damages.

Barbour involved a disability policy issued by UNUM through a school district and covering the Principal of a school in the district. The Group Salary Protection Insurance Policy (“Policy”) at issue provided Accident and Sickness Disability Benefits for one year in the event of total disability, and after one year, the Policy provided monthly long term disability income benefits for as long as the claimant remains totally disabled or otherwise qualifies for benefits, up to age 65. The Policy defined “Total Disability” during the first two years as the inability “to perform the material duties of your own occupation.” After two years, the Policy defined “Total Disability” as the inability “to engage in any gainful occupation for which you are reasonably qualified by training, education or experience.” In February 2003, the insured submitted a claim for disability benefits based on abdominal pain that restricted her from driving, walking/standing and sitting for extended period, and UNUM began paying benefits. Over the course of several years, the insured suffered multiple further injuries relating to her initial injury, which required multiple surgeries, and which rendered her totally disabled. The insured submitted regular medical reports and updates, and UNUM continued to pay disability benefits.

In December 2007, UNUM hired an investigator to conduct surveillance on the insured to confirm the claimed disabilities. The investigator observed a “female subject believed to be the insured” who was moving without the physical limitations represented to UNUM by the insured and her doctors. The investigator’s report and video raised suspicion within UNUM regarding the insured’s disability, and resulted in UNUM conducting further surveillance. UNUM investigators made a field visit in October 2008, and again conducted surveillance in January 2009. In February 2009, UNUM’s in-house doctor/consultant reviewed the file and prepared a report which concluded that the insured’s claimed disability was inconsistent with her findings. Then, in March 2009, UNUM’s “Designated Medical Officer” reviewed the file and determined that there were three occupations that the insured was capable of performing, notwithstanding her disability. UNUM thereafter revoked the insured’s disability benefits effective March 31, 2009, and advised her that she had the right to file a civil action under the section 502(a) ERISA statute. Unsurprisingly, the insured hired an attorney.

The insured’s attorney sent a letter to UNUM advising that UNUM’s determination that the claim was governed by ERISA was erroneous. The attorney also provided a letter from the insured’s doctor stating that the person observed during surveillance in December 2007 was not the insured. UNUM was also provided a functional capacity evaluation by the insured’s physical therapist that concluded that the insured’s “physical limitations presented a barrier to work.” This information was reviewed by UNUM’s in-house medical experts. On October 6, 2009, UNUM sent a letter agreeing with the insured’s position as to ERISA, but stating that the new medical information did not change UNUM’s decision to deny benefits.

UNUM filed a motion for summary judgment to dismiss the insured’s claims for breach of the implied covenant of good faith and fair dealing (bad faith), intentional infliction of emotional distress and punitive damages. To defeat the bad faith claim, UNUM relied on the “genuine dispute doctrine.” In rendering its ruling, the court noted that the overarching issue in a bad faith claim is whether the insurer’s claims-handling conduct was reasonable. Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002). The court then explained the applicability of the genuine dispute doctrine:

“The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable–for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. In such a case, because a bad faith claim can succeed only if the insurer’s conduct was unreasonable, the insurer is entitled to judgment as a matter of law.” Amadeo, 290 F.3d at 1161-62 (citation omitted). “On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” Id. at 1162 (citation omitted)(emphasis added).

The court held that a reasonable jury could conclude that UNUM acted unreasonably when it was informed that the evidence UNUM relied upon to deny the insured’s claim was wrong (i.e., the surveillance was of someone other than the insured). The court further determined that there was no evidence that UNUM’s experts evaluated the evidence with an eye towards favoring the insured and in a manner which would indicate that she was indeed disabled as she and her doctors asserted. The court relied upon the facts as viewed “in the light most favorable to Plaintiff” to determine that a jury could conclude that UNUM acted unreasonably, and thus in bad faith when it denied the insured’s claim. The court therefore denied UNUM’s motion for summary judgment.

The court also discussed UNUM’s initial erroneous determination that the claim was governed by ERISA, and held that it created evidence of insurer bias, which could also indicate and support a claim for bad faith. Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004) (citing Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co., 90 Cal. App. 4th 335, 348 (2001)).

The court placed a premium on UNUM’s apparent failure to reasonably and thoroughly investigate the insured’s claim. In particular, the court found that UNUM’s failure to seek an independent medical examination of the insured supported her claim that UNUM acted unreasonably. In so finding, the court discussed a line of cases which suggest that an insurer’s sole reliance on its own in-house experts, and its failure to obtain an independent medical examination, is clear evidence that an insurer has acted unreasonably.

Based on these findings, the court held that the insured’s claims for intentional infliction of emotional distress and for punitive damages were equally as viable based on UNUM’s potentially unreasonable conduct in evaluating the insured’s claim.

With this decision, the court made it very clear that an insurer cannot escape liability for bad faith by relying on its own in-house experts and ignoring evidence presented by an insured which, when viewed in favor of the insured, would indicate coverage should be afforded. An insurer cannot create a “genuine dispute” as to coverage on which it can deny an insured’s claim simply by relying on its own in-house experts. An insurer who does so, does so at its own peril, and opens itself up to claims for bad faith and punitive damages.

What are the Available Remedies Against an Insurance Company That Has Acted in Bad Faith?

This article will be the second in a series of articles by McKennon Law Group PC addressing and answering basic questions concerning insurance law. This one addresses: What are the available remedies against an insurance company that has acted unreasonably in handling an insurance claim?

The most common causes of action against insurers in the non-ERISA context are breach of contract and bad faith.

The breach of contract claim allows an insured to recover policy benefits owed under the insurance policy plus applicable interest from the date the benefits were due (or at the rate of 10% on delayed disability payments in California). The benefits due will depend on the type of policy at issue. They may be a specific amount (e.g., death benefits) or may depend upon a proof of loss (e.g., value of property damaged or destroyed).

The bad faith (aka breach of the implied covenant of good faith and fair dealing) claim potentially allows an insured/policyholder to recover future damages owed under the policy (in disability cases), attorneys’ fees, consequential damages (economic damages caused by the bad faith conduct, such as medical bills as a result of emotional distress, interest paid on borrowed funds, loss on investment where there was a forced sale caused by insurer’s denial, lost investment opportunities because personal funds had to be used to pay expenses), emotional distress and punitive damages.

There are three primary categories of damages recoverable in these types of actions:

Contract Damages – In first-party cases, the measure of contract damages is the benefits due under the policy. In third-party cases, the measure is the amount expended or liability incurred by the insured up to the policy limits. Consequential damages are also recoverable where appropriate, and are defined as those damages the parties should have foreseen as likely to result from a breach when they entered into the contract. Thus, an insured may recover damages that were within the parties’ reasonable expectation at the time of contracting.
Tortious (Extracontractual) Compensatory Damages – In bad faith actions, an insured may recover extracontractual compensatory damages based on an insurer’s tortious conduct. This includes all damages caused by the insurer’s tortious conduct, including both economic loss and non-economic harm (e.g., emotional distress). This will often include attorney’s fees reasonably incurred to compel payment of benefits due under an insurance policy (called Brandt fees).
Punitive Damages – In an action against an insurer where, in addition to bad faith or other tortious conduct, there is clear and convincing evidence of oppression, fraud or malice on the part of the insurer, the insured may recover punitive damages. Punitive damages will be awarded to punish an insurer for tortious conduct giving rise to an action not based on the terms of the insurance contract (e.g., fraud).

In addition to breach of contract and bad faith, other claims available to insureds are fraudulent and negligent misrepresentation, intentional and negligent infliction of emotional distress, invasion of privacy, and intentional interference with economic advantage. Each of these causes of action may allow for recovery of alternative and additional damages, including punitive damages.

For additional information on this and other insurance matters you can visit the FAQ section of our website: www.mslawllp.com.

If you need to consult with an attorney about a possible insurance bad faith or ERISA matter, please contact our office.

Dental Hygienist Wins Large Jury Verdict in Disability Insurance Lawsuit

In 1996, Plaintiff Laura Kieffer developed carpal tunnel syndrome and severe cervical pain which forced her to stop working as a dental hygienist. Thereafter, Kieffer started receiving disability payments under an individual disability insurance policy she purchased from Paul Revere Life Insurance Company and its parent company the Unum Group Corporation. Even though she had been receiving disability payments for nearly ten years, Unum terminated her benefits in March of 2008. As a result, Laura sued in Los Angeles Superior Court alleging that Unum had unreasonably terminated her benefits. She sued for breach of contract, insurance bad faith and for punitive damages. This week, a jury awarded her $4.2 million in compensatory and punitive damages. Unum intends to appeal the verdict.

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