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When you purchase homeowners insurance, you expect that it will be there when you need it. That means that if there is a natural disaster such as an earthquake, hurricane or a flood, it will be there. And in the environmental context, if oil is leaked from your heating oil tank, you expect that it will be there.
The relationship between homeowners and their insurance companies has been described as a fiduciary relationship. A fiduciary status means that this is more than just a contract relationship. This is a trusted relationship on which courts place even a higher level of scrutiny.
The funny thing about insurance is that we normally do not think much about it. We pay the premiums month after month and just assume that if we ever need the insurance, it will be there. It is quite a kick in the pants when after years of paying premiums an insurance company betrays that confidence.
Yet, jury's have been awarding punitive damage awards against insurance companies over the past several years finding that the insurance companies have betrayed that confidence. In 1999 a judge awarded $730 million in punitive damages against a national insurance company for using generic replacement parts on automobile repairs rather than manufacturer's parts.
In 1997 the same insurance company paid $100 million to settle claims that it had diminished earthquake coverage benefits for certain California residents without advising them of the reductions.
In 1998 an insurance company was hit with a $25 million punitive damage award based on allegations that it routinely destroyed documents and intentionally concealed claim mishandling practices.
That same year, there was a $9.5 million punitive damage award following a determination that the insurer routinely used bogus outside bill review companies to cut down the cost of medical claims.
Now one of the insurance company lawsuits has found its way to the Supreme Court and it is the subject of a substantial amount of controversy. The case is called Campbell vs. State Farm. A lower court was severally critical of State Farm. The case involved testimony by several State Farm employees that claims agents faced heavy pressure to cut costs and that the salary raises were largely related to their ability to meet apparently subjective payout targets.
There was also testimony that the company routinely destroyed old training aids, internal claim handling documents and other similar documents so that they could not be used against the insurer in litigation.
The trial court found that State Farm had created "a nearly impenetrable rule of defense against punishment for its wrong doing" and that this provided a basis for a hefty punitive damages award.
Punitive damages are damages which are designed to punish corporate wrong doings or deter others from similar conduct in the future. In this case the compensatory damage award was $1 million and the punitive damage award was $145 million. The judgment was sustained by the Utah Supreme Court and now is before the United States Supreme Court. Oral Argument on this case was heard in December of 2002 and we are still awaiting a decision.
What started as an insurance case is now a case that concerns the reasonableness of such hefty punitive damage awards. Those who oppose this decision say that there should be some kind of reasonable relationship between the amounts of harm sustained in this case, $1million worth of harm, and the punitive damage award which this time is 145 times greater.
Indeed, there is some legal support for this. In a case called Gore vs. BMW, a dispute over a $4,000.00 paint job that went awry, the United States Supreme Court reversed a $4 million punitive damage award finding that the judgment was excessive and urging that there be proportionality between compensatory damages and punitive damages. Those who challenged that Campbell decision say that it is at odds with the proportionality requirement established in the BMW case.
A lot rides on this Supreme Court decision. In truth, I really do not think there are that many excessive punitive damage awards. The big cases that often receive a lot of press are often reversed by appeals tribunals, and that is there job.
Punitive damages have forever represented a way to keep large companies in check and insure that they fulfill their fiduciary and contract responsibilities and that they take those responsibilities to heart. Placing an artificial limit on punitive damages will very likely encourage this kind of large scale corporate wrongdoing. And in this era of ENRON, etc., is that really a good idea?
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