The most recent Supreme Court decision on the constitutionality of punitive damages was a third-party insurance bad-faith case. State Farm Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003). In that case, the Supreme Court gave strong indications that in insurance cases the maximum punitive damages that may be constitutionally awarded is predicated on a one-to-one ratio between the punitive damages and the compensatory damages, i.e., they must be (nearly) equal to one another. However, on remand from the US Supreme Court the Utah Supreme Court held that, considering the facts involving State Farm and the Campbells, the insurer’s conduct and the injury involved merited punitive damages that were nine times the compensatory-damages award. 2004 UT 34.
Recently, the Oregon Court of Appeals had the opportunity to address the question of the appropriate ratio between punitive and compensatory damages in an insurance bad-faith case, finding that a three-to-one ratio was appropriate. Goddard v. Farmers Ins. Co., (Ore. Ct. App. Oct. 12, 2005). And the court made clear that this ratio approached the asymptotic limit.
In Goddard, the court found that the insurer intentionally, deceitfully, and maliciously:
stonewalled the claimant and lowballed settlement offers;
fraudulently manipulated the claims process;
unreasonably refused to settle;
sacrificed the insured’s interest in security to the insurer’s interest in maintaining its reputation for toughness on claims;
all of which the court found to be typical of the insurer’s business practices.
Nevertheless, in determining the appropriate multiplier for punitive damages, the court focused on the facts that the harm to the policyholder involved “only economic, not physical injury” and that the insurer’s conduct did not implicate any broad health or safety interest of the general public.
The court reviewed its recent decisions on punitive damages where it had upheld ratios of 4 to 1 or greater as constitutional. The cases all involved the risk of serious injury to the particular plaintiff and to similarly situated consumers.
In the context of this third-party bad-faith case, however, the court found that the maximum constitutionally permissible ratio was three times the compensatory damages. As the court summed up:
[T]he injury here was purely economic, without any threat to public health or safety,[though]defendant’s conduct was far more reprehensible – a calculated and repeated course of cynical and malicious betrayal of its insured’s trust – than the [Supreme] Court found to be the case in State Farm Mut. Ins. [v. Campbell]. Nor was this an ‘isolated incident.’ . . . [T]here can be no question . . . that ]the ‘stonewalling,’ the ‘low-balling’ the pressured manipulation of claims evaluations and the like, are all typical of how defendant did business: Defendant’s interests came first. On balance, the egregiously unethical character of defendant’s conduct justifies a proportionately greater award of punitive damages than the 1:1 ratio suggested by the Court in State Farm Mut. Ins. Conversely, the lack of serious physical injury or disregard for the health and safety of the consuming public dictates a proportionately lower award of punitive damages . . . . Accordingly, a 3:1 ratio of punitive damages to compensatory damages in this case comports with due process.
The Oregon court, however, did not mention that the remand in the State Farm case to the Utah Supreme Court, generally a steady court on bad-faith issues, held that a ratio of 9 to 1 was appropriate; presumably, since the Oregon court found the facts in Goddard to be more egregious than those in State Farm it would seem that more than a 9 to 1 ratio could have been sustained.
At all events, what the Goddard case signals is that, because the harms in insurance cases are psychic and economic and involve injury to the policyholder’s security, the new punitive-damages case law grants far more robust constitutional protections to insurers, banks, and other financial-services companies than what is afforded other companies that create a risk of physical harm. Verily, I recognize that Benjamin Franklin helped establish the insurance industry in this country, but it does not seem likely that he or the other founders of the Republic would have intended to clothe this one class of businesses with such special, constitutional protection.