United States: Nickerson v. Stonebridge Life Insurance Company

(Brandt Fees May Be Included In Calculation Of Punitive-Compensatory Damages Ratio In Determining Constitutionality Of Punitive Damages Awarded Against An Insurer, Notwithstanding Fees Award Made By Trial Court After Jury Verdict)

In Nickerson v. Stonebridge Life Insurance Company, ___ Cal.4th ___ (June 9, 2016), the California Supreme Court reversed the Court of Appeal's decision affirming the trial court's judgment that attorneys' fees awarded by the trial court pursuant to Brandt v. Superior Court, 37 Cal.3d 813 (1985) after a jury verdict awarding compensatory and punitive damages had been rendered cannot be included in determining the amount of compensatory damages to be considered for purposes of calculating whether an award of punitive damages is constitutional. The parties' dispute arose out of Stonebridge Life Insurance Company's ("Stonebridge") determination that plaintiff's entitlement to reimbursement of costs for a hospital stay was limited to 18 days pursuant to an indemnity benefit provision in the Stonebridge policy, notwithstanding that plaintiff had been hospitalized for a total of 109 days. Stonebridge failed to consult with plaintiff's physicians and arbitrarily determined the limitation for purposes of indemnifying plaintiff for his hospital stay to be 18 days at $350 per day.

As a result of Stonebridge's conduct, Nickerson filed a lawsuit for breach of contract and bad faith. Prior to the trial, the parties stipulated that if Nickerson succeeded on his complaint, the trial court would determine the amount of attorneys' fees for which Nickerson was entitled under the Brandt decision as compensation for having to retain counsel to obtain the subject benefits. At trial, neither party presented evidence to the jury concerning the claim for, or amount of, Brandt fees. Thereafter, the trial court granted Nickerson's motion for a directed verdict on the breach of contract cause of action and awarded him $31,500.00 in unpaid policy benefits. With respect to the bad faith cause of action, the jury returned a special verdict finding that Stonebridge's failure to pay policy benefits was unreasonable and awarded Nickerson $35,000.00 in damages for emotional distress. Thereafter, the jury found Stonebridge had engaged in conduct with fraud and awarded $19 million dollars in punitive damages. Subsequently, the parties stipulated that the amount of attorneys' fees to which Nickerson was entitled under Brandt was $12,500 and the court awarded that amount.

Stonebridge moved for a new trial seeking a reduction in the punitive damages award which it argued was constitutionally excessive. The trial court agreed and granted Stonebridge a new trial unless Nickerson consented to a reduction of the punitive damages award to $350,000. The trial court relied on the United States Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, 426 for the proposition that a punitive – compensatory ratio exceeding single digits will ordinarily exceed constitutional bounds. Hence, the trial court determined it was bound to reduce the punitive damages award to a ratio of punitive to compensatory damages of 10 to 1. In calculating the permissible amount of punitive damages, the court considered only the $35,000 the jury had awarded in compensatory damages for emotional distress for Stonebridge's tortious breach of the implied covenant of good faith and fair dealings; it did not include the $12,500 in Brandt fees.

Nickerson rejected the reduction of punitive damages and appealed the order granting a new trial. The Court of Appeal affirmed the trial court's decision limiting the amount of the punitive damages to a 10:1 ratio of punitive damages to compensatory damages. Further, the Court of Appeal held that the trial court had correctly calculated the amount of compensatory damages without consideration of the $12,500 in Brandt fees.

In reversing the Court of Appeal's decision regarding whether to include the award of Brandt fees in determining the amount of compensatory damages to be considered for applying the constitutional award of 10:1 ratio for punitive damages to compensatory damages, the Supreme Court noted that Brandt fees are considered compensatory damages. Hence, they should have been included as an element of compensatory damages in determining the constitutionality of the amount of punitive damages that should have been awarded to plaintiff for Stonebridge's wrongful conduct.

The Supreme Court commented on the factors applied in evaluating punitive damages as follows:

In a series of cases culminating in Gore, supra, 517 U.S. 559, the court developed a set of substantive guideposts that reviewing courts must consider in evaluating the size of punitive damages awards: "(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases." (State Farm, supra, 538 U.S. at p. 418, citing Gore, at p. 575.) A trial court conducts this inquiry in the first instance; its application of the factors is subject to de novo review on appeal.

The Supreme Court then noted the focus of Nickerson's appeal as follows:

Primarily at issue in this case is the second of the Gore guideposts, the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award. As the United States Supreme Court has explained, "[t]he principle that exemplary damages must bear a 'reasonable relationship' to compensatory damages has a long pedigree." (Gore, supra, 517 U.S. at p. 580.) The court cited "a long legislative history, dating back over 700 years and going forward to today, providing for sanctions of double, treble, or quadruple damages to deter and punish." (State Farm, supra, 538 U.S. at p. 425, citing Gore, supra, 517 U.S. at p. 581.) Although it has declined to "impose a bright-line ratio which a punitive damages award cannot exceed," the court, guided by this history, has concluded that "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." (Id. at p. 425.) Following the high court's guidance, we have explained that "ratios between the punitive damages award and the plaintiff's actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification ... , cannot survive appellate scrutiny under the due process clause." (Simon, supra, 35 Cal.4th at p. 1182.)

. . .

The controversy between the parties in this case stems from a trial court's postverdict award of Brandt fees to the prevailing plaintiff. In Brandt, we held that when an insurance company withholds policy benefits in bad faith, attorney fees reasonably incurred to compel payment of the benefits are recoverable as an element of the plaintiff's damages. (Brandt, supra, 37 Cal.3d at p. 815.) We explained that when an insurer breaches the implied covenant of good faith and fair dealing by failing to compensate the insured for a loss covered by the policy, "'the insurer is "liable for any damages which are the proximate result of that breach." [Citation.]' [Citation.]" (Id. at p. 817.) "When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss—damages — proximately caused by the tort." (Ibid.) We distinguished the recovery of these fees "from recovery of attorney's fees qua attorney's fees, such as those attributable to the bringing of the bad faith action itself," explaining that such fees "are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action." (Ibid.)

Because "the attorney's fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise." (Brandt, supra, 37 Cal.3d at p. 819, citing Dinkins v. American National Ins. Co. (1979) 92 Cal. App. 3d 222, 234 [154 Cal. Rptr. 775].) But we noted that "[a] stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services [citation], and proof that otherwise would have been presented to the jury could be simplified because of the court's expertise in evaluating legal services." (Brandt, supra, 37 Cal.3d at pp. 819–820.) Consistent with that suggestion, the trial court in this case accepted the parties' pretrial stipulation that if Nickerson were to succeed on his bad faith claim against Stonebridge, the court would determine the amount of attorney fees to which Nickerson was entitled under Brandt. After trial, the parties stipulated that the amount of attorney fees to which Nickerson was entitled was $ 12,500, and the court awarded that amount. The question is whether this amount may be included in the calculation of the ratio of punitive damages to compensatory damages for the purpose of determining whether, and by what amount, the jury's $ 19 million punitive damages award exceeds constitutional limits.

Based on the above reasoning, the Supreme Court held that the trial court's post-verdict award of attorneys' fees should have been included in the compensatory damages for purposes of determining the proper award of punitive damages in favor of Nickerson based on the 10:1 ratio of punitive damages to compensatory damages. The Supreme Court concluded as follows:

In sum, we find no reason to exclude the amount of Brandt fees from the constitutional calculus merely because they were determined, pursuant to the parties' stipulation, by the trial court after the jury rendered its punitive damages verdict. On the contrary, to exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured's harm. The effect would be to skew the proper calculation of the punitive-compensatory ratio, and thus to impair reviewing courts' full consideration of whether, and to what extent, the punitive damages award exceeds constitutional bounds.

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