Rarely the insured and insurer cannot agree about the benefits available by a policy of insurance. Even after an appropriate and unanimous appraisal award, the insured may decide they have been deceived or treated unfairly. As a result, they sue the insurer for breach of contract and breach of the court-made tort of insurance bad faith.
The new tort grew out of the failure of some insurers to deal fairly with those they insured. Because contract remedies did not provide, in the reasoning of some courts, a procedure by which adequate damages could be provided to the person wronged by his or her insurer, the courts created a new tort to allow the insured to recover what the courts considered an appropriate remedy. The concept of the tort of bad faith developed as a means of providing a recovery in tort for the breach of what had previously been regarded as a simple contract action.
Contract damages traditionally limited the injured party's recovery to those damages within the contemplation of the parties at the time the contract was made. This rule is codified in California in Civil Code, which provides:
For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate the party aggrieved from all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.1
Before the advent of the tort of bad faith, if an insurer breached the contract and wrongfully refused to pay a claim, the most that could be recovered would be the benefits promised by the insurance policy. Contract damages seldom compensate the insured sufficiently if he or she has been abused by the insurer. The measure of damages for a breach of contract often seemed to be inadequate where the wrongful conduct resulted in damages that were not foreseen at the time of contracting.
For example, not recoverable in a breach of contract case are:
• damages due to emotional distress;
• lost profits;
• other business losses and litigation costs; and
• bodily injuries.
With respect to emotional distress damages, the general rule is that they are not recoverable in a breach of contract action. In some special and limited circumstances where emotional trauma is particularly likely in the event of a breach, damages may be recovered even though no tort claim exists. These types of damages may have a devastating impact upon the non-breaching party.
If a tort theory can be used then the possibility exists for a much broader recovery. The measure of damages for a tort can include consequential damages, including all of the damages proximately resulting from the wrongful conduct even if they could not have been anticipated at the time of the contract, emotional distress, bodily injury, and consequential damages. California Civil Code provides:
For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.2
The measure of damages for a tort can also include punitive damages. As a result of the availability of tort damages, every suit against an insurer claiming wrongful denial of a claim will include—if state law allows it—a suit for breach of the covenant of good faith and fair dealing that seeks both contract and tort damages for the bad faith denial and as a bonus, punitive damages.
The U.S. Supreme Court has restricted on the extent of available punitive damages in State Farm Mutual Automobile Insurance Co. v. Campbell,3 where it overturned a $145 million verdict against an insurer. It said that a punitive damages award of $145 million was excessive and violated the Due Process Clause of the 14th Amendment. By reducing the exposure to excessive and debilitating punitive damages claims professionals can hope the Supreme Court's ruling gives insurers more courage to fight lawsuits over non-covered claims or where the insurer believes it is the victim of insurance fraud because their exposure to punitive damages is now limited.
The Campbell case arose out of an automobile accident where one party was killed and another severely injured. The Campbells, insured by State Farm, attempted to pass six vehicles on a two-lane highway, failed, and caused the driver of an oncoming car to drive off the road to escape collision with the Campbells' vehicle. The Campbells only had $25,000 coverage per person and $50,000 in the aggregate. The Campbells felt they were not at fault because there was no contact between the two vehicles. State Farm ignored the advice of its adjuster and counsel to accept policy limits demands and took the case to trial. The verdict at trial was over $180,000 and the State Farm-appointed counsel told the Campbells to put their house on the market since they would need the money to pay the verdict. State Farm refused to pay the judgment to fund an appeal.
The Campbells retained personal counsel to pursue an appeal that was not successful, entered into a settlement with the plaintiffs where the plaintiffs agreed to not execute on their judgment in exchange for an assignment of 90 percent of all money received in a bad faith action by the Campbells against State Farm. Before suit was filed, State Farm paid the full judgment.
At trial the plaintiffs brought in evidence of actions of State Farm in first party cases across the country, in third party cases not similar to the Campbells' auto accident, and other evidence not related to the facts of their case.
The Supreme Court found that State Farm's "handling of the claims against the Campbells merits no praise," but concluded "a more modest punishment could have satisfied the State's legitimate objectives."4
Instead, this case was used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country. However, a state cannot punish a defendant for conduct that may have been lawful where it occurred.
Due process requires federal courts to perform an "exacting" de novo review of the constitutionality of punitive damages awards to ensure "that an award of punitive damages is based upon an 'application of law, rather than a decisionmaker's caprice.'"5 Punitive damages serve the purpose of providing deterrence and retribution.
When a court is considering the amount, if any, of punitive damages to award, the Supreme Court's three punitive damages guide-posts must be proved:
1. "the degree of . . . reprehensibility or culpability" of the defendant's conduct;
2. "the relationship between the penalty and the harm to the victim" that the defendant caused; and
3. the sanctions other courts imposed for comparable misconduct.6
Not all courts follow, as gospel, the rules set forth in State Farm v. Campbell, like the Supreme Court's observation that "[s]ingle-digit multipliers are more likely to comport with due process, while still achieving the State's deterrence and retribution goals," does not proclaim an iron clad rule. While "[s]ingle-digit multipliers are more likely to comport with due process,"7 higher ratios, even double or triple digit ratios, are not per se unconstitutional. Punitive to compensatory damages ratios must be examined on a case-by-case basis. The precise award in any case, of course, must be based upon the facts and circumstances of the defendant's conduct and the harm to the plaintiff.
Additional consideration is required where a particularly egregious act has resulted in only a small amount of economic damages. Ultimately, each case must stand upon its own facts with the decisive measure being the reasonableness of the award under the circumstances.
The Kansas Supreme Court recognized those considerations in Hayes Sight & Sound.8 But they are not to be applied in a mechanical or scorecard fashion. Even if all of them pointed against manifest repre-hensibility, a punitive damages award should then be viewed as "suspect" rather than automatically deficient. Likewise, one of them alone supporting particular blameworthiness wouldn't necessarily compel a finding of constitutional adequacy.9
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