Reasoning Behind Punitive Damages Calculations Provided By California Appellate Court

Royal Oakes was quoted extensively in an Oct. 7, 2013, Claims Journal article, California Court Of Appeals Decision Provides Reasoning Behind Punitive Damages Calculations, about a significant insurance case where $19 million in punitive damages were awarded, then later shot down by the California Court of Appeals, which found the verdict excessive. The court capped the award at $350,000.

The case, Nickerson v. Stonebridge Life Ins. Co., involved a former Marine who sought payment for 109 days in the hospital due to a fall after his insurance company concluded that only 19 of the days were medically necessary. The jury awarded him $35,000 for emotional distress and $19 million in punitive damages.

Oakes told the publication that traditionally the way in which punitive damages have been calculated has varied.

“For years the appellate courts have been trying to interpret the various pronouncements by the U.S. Supreme Court about the issue of the size of punitive damages and specifically, the ratio of punitive damages to compensatory damages. The reason it has been a bit of a struggle on occasion is because of the high court and the appellate courts, in general, are not prepared to impose a strict bright line test, limiting punitive damages to a single digit ratio,” Oakes said.

“Having said that, this new case is one of many cases that have come very close to seeing that, in the absence of exceptionally reprehensible conduct, then it is a due process violation to exceed a ratio of 9 or 10 to 1. In fact, many appellate courts have suggested that far smaller ratios are appropriate in virtually all cases.”

Oakes also said that the decision is significant to insurers because it doesn’t include breach-of-contract damages.

“The significance of this decision is to reinforce the idea that though evidence of reprehensible conduct may have been found by a jury; nonetheless, it is almost impossible for an appellate court to find that a ratio of more than 10 to 1 between punitives and the compensatory damages satisfies constitutional due process requirements. There’s another very significant and separate aspect to this decision. When you figure out how much compensatory damages exist in order to come up with the punitives to compensatory ratio, do you have to decide what components of damages should be included in compensatory damages? This new Nickerson case reaffirms the idea that in computing compensatory damages, you do not include breach of contract damages. Instead, you only include damages for torts, such as bad faith and emotional distress,” he said.

According to Oakes, in Nickerson the court concluded that in determining compensatory damages, “for purposes of computing a ratio between punitive and compensatory, you do not include the breach of contract damages.

 “The reason for that is that punitive damages relate to tortuous conduct. You don’t get punitive for a breach of contract. You might get punitive for tort, depending on the tort and depending on whether the punitive damage standard is met, such as malice, oppression or fraud. And so, this case is an important reminder that in computing compensatory damages for purposes of arriving at a ratio between punitives and compensatory you exclude breach of contract damages and you include tort damages,” he said.

In general, if a contract is breached and the party who breached it is sued, damages are limited to contractor damages, the article notes.

“However, years ago, the courts decided that because of the special relationship between a policy holder and an insurance company that if a policyholder is suing for breach of contract and can also go beyond that and prove additional conduct such as bad faith or emotional distress then the policy holder is entitled to try to assert those causes of action,” Oakes said.

Oakes also told the Claims Journal that there have been several court decisions that have come close to saying it’s a due process violation to exceed the ratio of 9 or 10 to 1 between punitive and compensatory damages.

“I think that we have been moving in the direction of a bright line test limiting punitive damages to a single digit ratio. It may be that because every case is different and you occasionally see cases that suggest an extreme level of reprehensibility, there will continue to be a reluctance to impose a bright line test,” Oakes said.

Large "Bad Faith" Verdict Raises Two Intriguing Issues

The verdict by a Los Angeles jury last week awarding a health insurance claimant over $19 million raises a pair of issues of interest to health and disability insurers. 

In Thomas Nickerson v. Stonebridge Life Insurance Company, the plaintiff, an ex-Marine, sought payment for 109 days in the hospital after a fall. The insurance company believed expenses for only 19 of those days were medically necessary. A jury awarded Nickerson $35,000 in emotional distress damages, plus $19 million in punitive damages. 

As this case undoubtedly proceeds, first in a motion directed to the trial judge, and then likely on appeal, one issue that will be addressed is the appropriate amount of punitive damages that should be permitted (assuming any punitive damages survive). 

Case law in recent years has established that except in the most extraordinary circumstances, punitive damages should not exceed other compensatory damages by more than a single digit ratio. Some courts have even opined that a 4:1 ratio is the maximum amount to be awarded, and that a 2:1 or even 1:1 ratio would be more appropriate. 

Here, the ratio of punitive damages to compensatory damages somewhat exceeds the above guidelines -- it pencils out to 543:1. It's true that depending on the level of reprehensibility of a defendant's conduct, and where compensatory damages are nominal, the courts may be open to approving punitive awards in excess of a the above ratios, but those circumstances do not appear to apply in this case. 

The second issue raised by the Nickerson case is the alleged obligation by an insurer to accept or give great deference to the opinion of an insured's physician, with respect to the question of medical necessity under a health policy. 

Nickerson's lawyer, William Shernoff of the Claremont, California firm of Shernoff Bidart & Echeverria LLP, has expressed the hope that this case will lead to a recognition by the courts that the medical judgment of policyholders' treating physicians should be accepted by carriers. 

In fact, this case is unlikely to lead to such a result.  

Appellate courts have long recognized that the issue of medical necessity should not be one that is dictated by the view of any particular expert or practitioner, but instead should turn on which party presents the most compelling evidence on the coverage question. 

The notion that a policyholder's doctor has a monopoly on truth or good judgment, especially when that physician may hold a view based on a longstanding affinity for a patient, and an unquestioning acceptance of self-reported symptoms that may or may not be reliable in light of clinical or objective testing, is unlikely to find favor with the bench officers asked to decide coverage questions.

Los Angeles Jury Finds Health Insurer is Required to Pay for Out-of-State Liver Transplant

With the backdrop of the raging battle over healthcare reform, a Los Angeles jury rendered on Monday a verdict in favor of an insured against Anthem Blue Cross arising out of the health insurer’s refusal to provide coverage for an out-of-state liver transplant. The case, Ephram Nehme v. Wellpoint, Inc.; Blue Cross of California d/b/a/ Anthem Blue Cross, initially filed on August 14, 2008, has been closely followed in the legal and health insurance communities.

As reported in the Los Angeles Times, the jury found, by a vote of 10-2, that Anthem Blue Cross had breached its contract by refusing to pay for the cost of the out-of-state transplant operation, and by a vote of 9-3 that Anthem Blue Cross had acted in bad faith. Anthem Blue Cross stated in the article that its contract provides that transplants must be preformed in California and that it had approved Nehme for a transplant at UCLA Medical Center once his name came up on the UCLA waiting list. The same article stated that the jury awarded Nehme $206,000 for the cost of the operation, and that he would also be able to recoup his legal fees. (Under California law, pursuant to the decision in Brandt v. Superior Court, upon a finding that an insurer has acted in bad faith, the insured is able to seek to recover only those attorney’s fees incurred to obtain the contract benefits, but not the fees incurred to show bad faith.) The jury did not, however, award any punitive damages against Anthem Blue Cross.

The trial court proceedings are not yet concluded, with further post-trial motions to be filed, and it is unknown whether Anthem Blue Cross will appeal the jury’s verdict.

California Supreme Court Adopts 1:1 Ratio for Punitive Damages

On November 30, 2009, the California Supreme Court held in Roby v. McKesson Corporation, et al. that a punitive damage to compensatory damage ratio of one-to-one is the U.S. Constitutional maximum permissible under the Due Process Clause where the compensatory damage award is substantial.

Plaintiff Charlene Roby brought wrongful discharge and harassment claims against her former employer, McKesson Corporation ("McKesson"). The jury awarded her $3,511,000 in compensatory damages and $15 million in punitive damages. After finding that the appropriate compensatory award was approximately $1,900,000, the Supreme Court turned to whether the punitive damage award which had already been reduced to $2 million by the Court of Appeal was excessive.

The Court first analyzed the reprehensibility of McKesson's conduct through the following factors:

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