United States: Ninth Circuit Issues Mixed-Bag Decision On Punitive Damages In Insurance Bad-Faith Case

Last Updated: December 13 2017
Article by Evan M. Tager

Keywords Punitive Damages, GEICO, Ninth Circuit, guidepost

The Ninth Circuit recently issued an unpublished memorandum opinion reducing a $2.5 million punitive award against GEICO to $1,064,282.44—four times the compensatory damages—in a Montana insurance bad-faith case. When it comes to punitive damages doctrine, the decision is a mixed bag.

Because the court elected not to issue a published opinion, it didn't bother setting forth the facts. All we are told is that the jury found that GEICO had acted in bad faith and that the court therefore had concluded that the conduct "while not admirable, was of low to moderate reprehensibility." A simple finding of bad faith ought not, however, justify imposing any amount of punitive damages, much less in excess of $1 million. As the Supreme Court explained in State Farm,

It should be presumed [that] a plaintiff has been made whole for his injuries by compensatory damages, so punitive damages should only be awarded if the defendant's culpability, after having paid compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence.

The Ninth Circuit ignored this important principle.

The court also committed a conceptual error in evaluating the ratio guidepost. The court included in the denominator of the ratio $66,070.61 in attorneys' fees, interest, and costs. But the court failed to appreciate that these kinds of awards, which bear no relationship to the defendant's ill-gotten gain and are available only in a fraction of tort cases, function much like punitive damages. They accordingly should be included in the numerator, added to both the numerator and denominator, or simply ignored.

Under any of those approaches, the punitive/compensatory ratio would have been higher than the 9:1 ratio used by the panel. Notwithstanding this error, the court correctly concluded that the ratio was indicative of an excessive punitive award, but—as discussed below—its miscalculation likely affected the magnitude of its reduction of the award.

Turning to the third guidepost, the court correctly compared the punitive award to the maximum fine for unfair claims practices under Montana law—$5,000 per violation—and then held that the disparity between the punitive damages and the statutory fine was an indication that the punitive award was excessive. This holding is important because all too often courts ignore the third guidepost, declaring—in defiance of BMW and State Farm—that the modest size of the statutory penalty makes it an inapt comparator.

But while the Ninth Circuit was plainly correct in holding that the punitive award was excessive, it made some fundamental conceptual errors in reducing the punitive damages to a 4:1 multiple of the compensatory damages, attorneys' fees, interest, and costs.

Most signficantly, the court gave no heed to the Supreme Court's admonition in State Farm that "[w]hen compensatory damages are substantial," a punitive award "perhaps only equal to compensatory damages[] can reach the outermost limit of the due process guarantee."

The panel invoked a framework set forth by a prior Ninth Circuit panel under which a 4:1 ratio is deemed to be "a good proxy for the limits of constitutionality" when the defendant's conduct "is not particularly egregious and there are significant economic damages" (internal quotation marks omitted). But that framework does not require courts to use a 4:1 ratio in every case involving less than "egregious" conduct and "significant economic damages." Rather, for this framework to comport with State Farm, the 4:1 ratio must be reserved only for the most exceptional cases within this category—for example, cases in which the compensatory damages do not remove the ill-gotten gain from the conduct and the conduct, though not "egregious," is at least in the middle of the spectrum of reprehensibility.

In this case, it would appear that the conduct does not rise beyond the low end of the reprehensibility spectrum and, moreover, the awards of attorneys' fees, interest, and costs ensure that punitive damages are unnecessary to remove the defendant's ill-gotten gain (if any ). In such circumstances, State Farm requires that the punitive damages not exceed the amount of compensatory damages.

Moreover, as discussed above, including the attorneys' fees, interest, and costs in the denominator is disconsonant with punitive damages theory. All of these awards have punitive and deterrent effects. And those effects are multiplied four-fold given the 4:1 ratio imposed by the panel. That is a recipe for excessive punishment.

Another problem with the court's adoption of what is effectively a 4:1 safe harbor is that the resulting reduced award exceeds the maximum fine by more than $1 million and is more than 200 times that fine. Hence, if the jury had actually imposed a punitive award of this magnitude, the third guidepost would indicate that it such an award is excessive—particularly when considered along with the court's conclusion that the conduct was of only low to moderate reprehensibility. No different conclusion is warranted when a court is reducing an even higher award.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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