The California Court of Appeal (Second Appellate District, Division Two) has issued an opinion which, although unpublished, is a must read for anyone handling an insurance bad faith case involving punitive damages.

The jury awarded $682,000 in compensatory damages and $2.5 million in punitive damages (a ratio of 3.7-to-1) against an insurance company for unreasonably denying coverage. The trial court granted a conditional new trial unless the plaintiff agreed to accept a remittitur of the punitive damages to $682,000. The plaintiff refused to accept the remittitur and appealed from the order granting a new trial.

The Court of Appeal affirmed. First, it noted the “abuse of discretion” standard of review governs appellate review of a trial court order granting a conditional new trial based on excessive punitive damages, not the “de novo” standard of review that applies to a defendant’s appeal from a judgment awarding punitive damages.

Next, the court evaluated the defendant’s conduct and determined that it was relatively low on the reprehensibility scale because the plaintiff’s losses were purely economic, there was no indifference to public health or safety, the plaintiff was not financially vulnerable, and the defendant was not a repeat offender.

Turning to the ratio between punitive and compensatory damages, the court cited several recent California opinions that have imposed a 1-to-1 limit in cases with relatively low levels of reprehensibility. The court rejected the plaintiff’s argument that the ratio calculation should include prejudgment interest or speculative “potential harm” claimed by the plaintiff. The court also cited Justice Souter’s majority opinion in Exxon Shipping, which noted that the median ratio is less than 1-to-1 across the entire gamut of circumstances that can support punitive damages.

Finally, when considering the third guidepost for evaluating punitive damages – – legislative or regulatory penalties for comparable misconduct – – the court rejected the plaintiff’s argument that the defendant insurer could have been fined $10,000 under Insurance Code section 790.035 for each “will, unfair or deceptive act” in its dealing with the plaintiff. The court said that even assuming the insurer’s acts were punishable under that statute, the insurer’s liability in this case was based on its handling of a single claim for a single insured, and therefore was not comparable to conduct that would trigger multiple penalties under the statute.

By our count, this is the sixth California appellate decision in the past 3 years in which a punitive damages award was reduced from a single digit ratio down to a 1-to-1 ratio, either by the trial court or by the court of appeal. The others are:

Stevens v. Vons (2009) [unpublished] [ratio reduced from 10-to-1 down to 1-to-1]

Walker v. Farmers Ins. Group (2007) 153 Cal.App.4th 965 [ratio reduced from 5.6-to-1 down to 1-to-1]

Jet Source Charter, Inc. v. Doherty (2007) 148 Cal.App.4th 1 [ratio reduced from 4-to-1 down to 1-to-1]

Grassilli v. Barr (2006) 142 Cal.App.4th 1260 [ratios reduced from 8.4-to-1 and 7.5-to-1 down well below 1-to-1]

Roby v. McKesson HBOC (2006) 146 Cal.App.4th 63, review granted [ratio reduced from 10.7-to-1 down to 1.4-to-1]