In this published opinion, the California Court of Appeal (Second Appellate District, Division Two) holds that a punitive damages award of $1.7 million is excessive and must be reduced to $500,000.
The jury in this insurance bad faith case originally awarded $170,000 in compensatory damages, plus $3 million in punitive damages, for a 17.6-to-1 ratio. After the verdict, the trial court awarded $346,541.25 in attorney’s fees as additional damages under Brandt v. Superior Court (1985) 37 Cal.3d 813. The trial court also concluded, however, that the jury’s punitive damages award was excessive and should be reduced to $1.7 million, ten times the jury’s compensatory damages award.
The Court of Appeal concluded that the trial court’s reduced award was still excessive. First, the court noted that the defendant’s conduct, which involved no physical harm or disregard for health and safety, implicated only one of the five “reprehensibility factors” identified by the U.S. Supreme Court in State Farm v. Campbell. The court held that the defendant could not be treated as a repeat offender merely because its conduct in this case involved a course of dealing with the plaintiff, rather than a single isolated incident; the court observed that the case involved only one insured and one claim, without any evidence that the defendant had engaged in similar conduct towards other insureds in the past.
Next, the court addressed the ratio of the punitive damages award to the compensatory damages award, and concluded that the defendant’s conduct could not support a 10-to-1 ratio. The court rejected the plaintiff’s invitation to add the trial court’s Brandt fee award to the jury’s compensatory damages award, which would yield a 3.2-to-1 ratio. The court said that the Brandt fees could not be considered for ratio purposes because they were awarded after the jury’s verdict.
Having concluded that a 10-to-1 ratio was too high, the court then turned to the question of what the maximum ratio should be. Although the court discussed the U.S. Supreme Court’s Exxon Shipping opinion and other recent decisions imposing a 1-to-1 ratio (including the California Supreme Court’s recent decision in Roby v. McKesson), the court ultimately decided upon a 3.8-to-1 ratio, which results in an award of $500,000. The court picked that figure not just because it’s a nice round number, but because defense counsel had suggested during closing argument that the jury could award as much as $500,000. The court didn’t assign any evidentiary value to counsel’s argument, and did not find estoppel based on that argument, but the court said it independently agreed that $500,000 was the appropriate ceiling.
Full disclosure: Horvitz & Levy LLP represented the defendant on appeal.
