Add yet another appellate opinion to the growing list of California courts that have cut punitive damage awards on constitutional excessiveness grounds. In this one, Amerigraphics, the jury awarded $3 million in punitive damages in an insurance bad faith case. The trial court cut that number to $1.7 million, but according to the California Court of Appeal (Second District, Division 2), that was not enough. The constitutionally-permissible maximum was $500,000.
At the risk of looking a gift horse in the mouth, the case is a mixed bag for insurer defendants.
One of the principal questions in deciding excessiveness is how bad – “reprehensible” – the defendant’s conduct was. That is determined under a scale of relative reprehensibility. The theory is simple: relatively speaking, some acts and harms are worse, and therefore more deserving of punishment, than others. For example:
1. Defendants who are repeat offenders – who have committed the act before – need a bigger punishment to discourage them from repetition, to get the message across.
Amerigraphics rejected the notion that an insurer which commits multiple acts in the handling of a single claim for benefits can be viewed as a “repeat offender.” Though the insurer’s
“conduct could be characterized as more than a single isolated incident, as the evidence showed several discrete acts of misconduct involving Amerigraphics’s claim for coverage under various policy provisions, the conduct at issue ultimately involved only one insured and one claim. There was no evidence presented that [the insurer] acted similarly toward other insureds in similar circumstances.” (Emphasis added.)
More authority for the “one claim, one punishment rule.” That’s as it should be. Any act – such as the denial of a single claim for benefits – could theoretically be broken down into a series of smaller “sub-acts.” That doesn’t mean the punishment should be multiplied by the number of sub-acts. (See also Walker v. Farmers Ins. Exch. (2007) 153 Cal.App.4th 965, 975; 63 Cal. Rptr. 3d 507) Courts should not be in the business of finding ways to maximize a plaintiff’s punitive award. By definition, in the constitutionality jurisprudence, the plaintiff is made whole by the compensatory award; the punitive award punishes the defendant; it does not compensate the plaintiff for the injury.
2. Physical harm is worse than economic harm, but, relatively speaking, a defendant who causes economic injury to a financially vulnerable plaintiff deserves more punishment.
Amerigraphics suggested that the very nature of the insurance relationship means that insureds will qualify as “financially vulnerable.” The court relied on the “unique” nature of the relationship: insureds purchase policies “precisely to buy peace of mind and security.” Therefore, an insured is “not on equal footing . . . .” with its insurer. That may have been true in the Amerigraphics case, which involved a small insured put out of business by the carrier’s claims handling, but it does not apply across the board, nor should it. When, e.g., the insured is a large corporation with an insurance claim, the parties are on relatively equal footing. The concept of financial vulnerability is not automatically satisfied merely because this is an insurance relationship. Example in point: Slottow v. Amer. Cas. Co. of Reading, Pa. (9th Cir. 1993) 10 F.3d 1355, 1362 (applying Calif. law.)