September 2013

In many cases, punitive damages dwarf compensatory damages. However, one should not overlook the importance of the compensatory element of damages, as they can serve as a limiting factor for the punitive component. In Nickerson v. Stonebridge Life Insurance Company (B234271, Aug. 29, 2013), the California Court of Appeal affirmed the trial court’s reduction of the jury’s punitive damage award to ten times the tort damages. In reaching this decision, the Appellate Court extensively discussed the defendant’s conduct, and its application under federal and California punitive damage law. Under the Court’s analysis, a large punitive damage award could have been justified under numerous other considerations. Nevertheless, in the final analysis, punitive damages were limited by a mathematical multiplier on a relatively small base and the jury’s $19 million award was reduced to $350,000, ten times the $35,000 compensatory damages amount.

The Court’s ultimate conclusion is summarized below:

“Based on our application of the Gore guideposts to the facts and circumstances of this case, Stonebridge‘s reprehensible conduct that resulted in only a relatively small economic damage award, and Stonebridge‘s $368 million net worth, a significant ratio of punitive to compensatory damages comports with due process. We hold the trial court properly remitted the jury‘s award to the outside constitutional limit of a 10:1 ratio of punitive to compensatory damages.

Nickerson and Amicus Curiae, United Policyholders, argue that in view of the small size of the compensatory damages awarded Nickerson, a ratio of something larger than the 10:1 in the remittitur is called for. They point to the trial court‘s concern that where Stonebridge‘s conduct was highly reprehensible, a multiplier of 10 to 1 may function simply as a cost of doing business. Thus, they argue, the court should have fixed a larger ratio to achieve a more effective deterrent. While we agree with Nickerson and Amicus Curiae that Stonebridge may fold this award into its cost of doing business, we also agree with the trial court that we are constrained by case law and the Constitution. The nature and size of Nickerson‘s compensatory damage award does not justify a punitive damage award beyond the constitutional maximum. While Stonebridge‘s financial condition is an essential consideration to be factored into our analysis, it alone cannot justify exceeding what due process will allow. We have considered these facts in our analysis. We conclude that 10:1 is the maximum constitutionally defensible ratio.”

Nickerson was a disabled veteran seeking coverage from his insurance company during treatment his doctor indicated (and the jury agreed) was medically necessary.  In addition, the jury found Stonebridge had “engage[d] in the conduct with fraud” when denying his claim and believed a multimillion dollar deterrent award, representing approximately 5% of the company’s net worth, was appropriate. Regardless, the Court found that amount, which may have been justified by the conduct, inconsistent with the governing legal limitations. The U.S. Supreme Court has said that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process”.

In Nickerson’s situation, additional consequential damages may not have existed. However, the lesson for other plaintiffs is that compensatory damages deserve significant attention, even when punitive damages are likely. Without a larger base of compensatory damages as a starting point for the multiplier, punitive damages will not turn a small case into a large one.  In such matters, it is clearly worthwhile to pursue all appropriate avenues of economic loss and thereby provide the jury with a starting point that allows greater flexibility for punitive amounts that will actually have a chance of serving as a deterrent against future similar conduct.

Fulcrum Inquiry performs economic analysis of injury and employment damages.