February 3, 2012

Punitive damages in bad faith cases

The Shernoff Bidart law firm, which specializes in suing insurance companies, has posted an essay on their website about punitive damages in cases of institutional bad faith.

The essay, originally published in the Daily Journal, argues that courts should not apply the U.S. Supreme Court's analysis in State Farm v. Campbell to cases of institutional bad faith.  In particular, the essay contends that lower courts should not follow State Farm's statements about ratio ("few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process") in bad faith cases, and that much higher ratios should be permitted in cases where the defendant's misconduct arises from a "bad corporate culture."

The essay seems to overlook the fact that State Farm itself was a bad faith case.  If anything, State Farm's principles should apply with more force in bad faith cases than in other types of cases.  State Farm expressly rejected the notion of punishing a defendant for a bad corporate culture:  "a defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business."

The Shernoff essay correctly observes that State Farm did not prohibit ratios in excess of 9 to 1 in all situations.  But State Farm recognized only a limited exception where larger ratios may be permitted: where “a particularly egregious act has resulted in only a small amount of economic damages."  Nothing in State Farm remotely suggests that an additional exception exists for bad faith cases. To the contrary, State Farm holds that the permissible ratio in a particular case depends upon the nature of the conduct, and that conduct involving violence or physical harm should be punished more harshly than purely economic torts like bad faith.