Legal News

Insurance Bad Faith and Punitive Damages

By Brian Harris

In a prior post, I suggested that one of the trends in insurance bad faith litigation is the narrowing of the applicability of Pennsylvania?s bad faith statute, perhaps in an effort by the appeals courts to stem the tide of the perceived misuse of bad faith claims as add-ons to coverage and other first party claims. 

The caselaw addressing the proper measure of punitive damages is trending, it appears, in the same direction, and is important that those who handle bad faith cases for either insureds or insurers, stay current with that common law as well.  This evolving common law is also integral to the proper valuation of a bad faith case, so that an insured may assess his upside possibilities and a defendant may assess its downside exposures. 

In State Farm Mutual Auto Insurance Company v. Campbell, the U.S. Supreme Court held that ?few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.?  The court added that an award of more than four times the amount of compensatory damages might be closer to the line of ?constitutional impropriety.?  Finally, the court held that where compensatory damages were substantial a lesser ratio might even be appropriate. 

Recently, the 3rd U.S. Circuit Court of Appeals in Jurinko v. Medical Protective Co. issued an opinion strongly suggesting that the appropriate punitive damages ratio in the vast majority of cases is about 1:1, not 4:1, and not 9:1.  In Jurinko, the 3rd Circuit affirmed a judgment against the insurer in a bad faith case but, in so doing, unanimously reduced a punitive damages award of $6.25 million on a compensatory award of $1.66 million to a number roughly approximating the 1:1 ratio.  
    
While the court in Jurinko left room for the possibility of larger ratios in cases of egregious behavior, it serves for the time being as the latest in a line of punitive damages cases which seem to be moving the line of acceptable punitive award rations from 9:1 downward, initially down to 4:1 and, now, potentially down as far as 1:1.  There is room for exceptions, one suspects, although in the overwhelming majority of cases, especially where large compensatory awards are made, Jurinko is valid support for an argument that any punitive damages award in excess of 1:1 may violate a defendant?s due process rights. Because the Pennsylvania Bad Faith Statute specifically allows the possibility of a punitive damages award, see, 42 Pa. C.S.A. §8371, Jurinko is important to those litigating bad faith cases. 

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com/

Full post as published by The Legal Intelligencer Blog on May 20, 2009 (boomark / email).