September 15, 2009

South Carolina Supreme Court Cites "Potential Harm" to Support $10M Punitive Damages Award; Actual Damages Were $150,000

As the name of this blog suggests, our primary focus is California punitive damages litigation. We summarize all of the punitive damages decisions, published and unpublished, issued by the California appellate courts and the Ninth Circuit. Occasionally, however, we discuss notable punitive damages decisions from other jurisdictions, especially where the award is especially high or the issues are especially interesting. This opinion from the South Carolina Supreme Court is one of those out-of-jurisdiction cases that caught my eye.

This case, Mitchell v. Fortis Insurance, involved an insurer's recission of a health insurance policy for an HIV-positive teenager. The jury awarded the plaintiff $150,000 in damages for the bad faith recission of the policy and $15 million in punitive damages (a ratio of 100 to 1).

On appeal, the South Carolina Supreme Court affirmed the liability finding and the compensatory damages but reduced the punitive damages from $15 million to $10 million. Although the reduced number was still 67 times larger than the plaintiff's actual damages, the court justified the award based on the potential harm the plaintiff could have suffered. The court cited the U.S. Supreme Court's 1993 decision in TXO Production Corp., which stated that reviewing courts may compare a punitive damages award not only to the actual harm inflicted on the plaintiff, but also "the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded."

The South Carolina Supreme Court said the evidence showed the defendant's conduct could have caused the plaintiff an additional $1.1 million in damages. Comparing the punitive damages to the jury's actual damages award plus the potential harm, the court came up with a ratio of 9.2 to 1. The court concluded that such a ratio was acceptable given the highly reprehensible nature of the defendant's conduct.

This case illustrates one of the possible avenues for plaintiffs to circumvent the single-digit ratio language in BMW v. Gore and State Farm v. Campbell. Although many plaintiffs cite "potential" harm as a way of justifying an otherwise unconstitutional ratio, courts rarely uphold awards on that basis. In California, our Supreme Court has held that courts may consider potential harm only to the extent that such harm was foreseeable by the defendant and "likely to occur." (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1149, 1177-1178.) Those limitations make it difficult for plaintiffs to rely on potential harm in many cases, but as this case illustrates, the concept can be a powerful weapon for plaintiffs under the right circumstances.

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