Punitive Damages in the U.S. – A European Underwriter's View
Ausgabe: August 2015 | P/C General Industry, General Liability | PDF herunterladen | English Von Dr. Mathias Schubert
Overview of the law
A court (jury) may award punitive damages in a civil action for damages where the conduct of the defendant is so egregious, wanton or malicious that punishment of the defendant and deterrence of the defendant and others are deemed appropriate over and above compensatory damages.
Punitive damages are generally a matter of state law, and both existence and application differ from one state to another. The one area of federal law where punitive damages may be awarded is Maritime law.
While punitive damages are awarded to the plaintiff, he or she is not the only beneficiary. A number of states have laws whereby the state, or a state agency, receives a share of the punitive damages award (for example, in Georgia 75% of the award goes to the state treasury). Furthermore, punitive damages are generally subject to state and federal income tax. Finally, the lawyers benefit from punitive damages through the contingency fee arrangement made with the plaintiff. As one might expect, the interaction of these various elements is complex, but of limited relevance to an insurer.
Tort law in Continental Europe does not recognize punitive damages, although a punitive element may be wrapped into conventional heads of damages. For example, German courts will contemplate, among other factors, the nature of the defendant’s conduct when determining the size of an award meant to compensate for non-economic loss, colloquially referred to as “pain and suffering”.
It is therefore not surprising that courts in several European countries have considered U.S. verdicts awarding punitive damages as unenforceable, as far as the punitive damages are concerned, on the grounds that such enforcement would violate the Ordre Public.1 This chapter will provide a summary of the salient points in the area of punitive damages.2
Standards of conduct
Below are a number of examples of the standards applicable under state law for determining if punitive damages can be awarded:3
- Alabama: acts committed with malice, willfulness or wanton and reckless disregard for the rights of others
- Alaska: either outrageous conduct, including acts done with malice or bad motives, or conduct that evidenced reckless indifference to the interest of another person
- Florida: intentional misconduct or gross negligence; acts complained of must have been committed with malice, moral turpitude, wantonness, willfulness, outrageous aggravation or with a reckless indifference for the rights of others
- At first sight, California law looks like an example of a very restrictive concept: fraud, oppression or malice. However, “malice” is construed by the courts in a broad manner, encompassing not only a malicious intention to injure the specific person harmed but also conduct evincing a conscious disregard of the rights of others.
A few examples of well-known awards
There have been a number of famous product liability cases from the automotive sector, some of which reflect a veritable recipe for disaster: an automotive company’s knowledge of the problem, combined with inaction and an attitude that attaches an economic value (expected damages) to life/physical integrity as part of a cost-benefit analysis.
The Ford Pinto cases are legendary, e.g. the case Grimshaw v. Ford,4 in which an internal memo outlined that paying for deaths, severe burns and damaged cars is cheaper than fixing the problem. A California jury awarded a total of USD127.5 million (of which USD125 million was punitive damages) to a boy who had suffered severe and disfiguring burns in an accident in 1972, although an appeals court judge reduced the award to USD3.5 million.
In September 1978 Ford initiated a recall for 1.5 million vehicles. Each car received a new fuel-tank filler neck that extended deeper into the tank and was more resistant to breaking off in a rear-end collision. Additionally two plastic shields were installed: one between the differential and the tank, and the other to deflect contact with the right-rear shock absorber.
Liebeck v. McDonald’s Restaurants5 is a famous case from the early 1990s, often (especially internationally) misunderstood and considered an outlier case purportedly typical of the “crazy liability landscape” in the U.S., and which elicited many dismissive remarks, such as “Any fool knows that coffee is hot!” In this case, a 79-year-old woman from Albuquerque, New Mexico, had purchased coffee at the drive-through window of a local McDonald’s. Sitting in the passenger seat of the automobile, which was not in motion at that time, she placed the Styrofoam cup between her knees in order to remove the lid. The cup tilted, and all of the coffee spilled into her lap. She was exposed to the scalding liquid for 90 seconds and suffered second- and third-degree burns on her thighs, buttocks and groin, amounting to 6% of her body surface. The burns were severe enough to require skin grafts and eight days of hospitalization, two weeks of immobilization at home and medical treatment lasting two years.
Liebeck demanded that McDonald’s cover her medical bills of USD20,000, which McDonald’s refused. She sued McDonald’s, and during discovery, it became apparent that McDonald’s kept its coffee at between 180 and 190 degrees Fahrenheit (82 - 88 degrees Celsius), substantially higher temperatures than at other establishments and even more so compared to coffee served in a private setting. Also, internal documents from McDonald’s revealed that the company had received over 700 complaints by people burnt by McDonald’s coffee between 1982 and 1992. Some complaints involved severe burns, similar to the case at hand. At trial, this led the jury to find McDonald’s knew their product was dangerous and injuring their customers, and that the company had done nothing to correct the problem. The jury awarded USD200,000 in compensatory damages, but determined that there was 20% contributory negligence on the part of the plaintiff, reducing compensation to USD160,000. The jury also awarded USD2.7 million in punitive damages. The judge later reduced the punitive damages to USD480,000. Still, we do not know what the ultimate outcome of the case was, as the parties subsequently entered into a settlement that remained secret.
Case law on constitutional limits to multipliers
When the U.S. tort system began to become notorious in the 1970s and 1980s, one feature was escalating awards of punitive damages. In two landmark cases, this topic was litigated all the way to the U.S. Supreme Court.
In 1996 the Court ruled that “grossly excessive” punitive damages could violate the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution, BMW of North America, Inc. v. Gore.6 In this case the plaintiff had purchased a new vehicle that he later discovered had undergone repainting due to minor damage prior to delivery. The plaintiff was initially awarded USD4,000 in compensatory damages, as well as punitive damages, initially amounting to USD4m (a factor of 1,000). The award was subsequently reduced on appeal to USD2 million (a factor of 500). While not providing specific guidance on constitutionally acceptable multipliers, the Court decided that the ratio between compensatory damages and punitive damages in the case at hand was “clearly outside the acceptable range”.
The Court developed the following guideposts to be considered when contemplating the appropriateness of a punitive damages award:
- The degree of reprehensibility of the defendant’s misconduct
- The disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award
- The difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases
Seven years later, the U.S. Supreme Court issued a ruling that was somewhat more specific on acceptable multipliers, in State Farm Mutual Automobile Insurance Co. v. Campbell.7
The background to this case was an automobile accident caused by Campbell in 1981, in which one passenger in the other car was killed and the other passenger was severely injured, resulting in permanent disability. Even though the evidence was unfavorable for Campbell, State Farm decided to refuse the settlement offers (USD50,000 in total, which was equal to the policy limits) made by the plaintiffs and to defend the case. After the jury found Campbell 100% liable and awarded the plaintiffs almost USD186,000 in damages, Campbell sued State Farm, based on bad faith and other legal grounds and demanding compensation for non-economic loss on top of economic loss, as well as punitive damages. At the end of the complex proceedings stood an award of compensatory damages amounting to USD1 million and of punitive damages amounting to USD145 million (the latter reinstated by the Utah Supreme Court after the trial judge had reduced it to USD25 million).
In its decision, the Supreme Court refused to provide a rigid yardstick, but referred to a long legislative history providing for double, treble and quadruple damages. The Court considered these ratios not as binding, but as instructive inasmuch as they “demonstrate what should be obvious: Single-digit multipliers are more likely to comport with due process, while still achieving the State’s goals of deterrence and retribution …”. The Court also suggested that when compensatory damages are “substantial” (which it considered to be the case in Campbell), a “lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.”8
Upon remand, the Utah Supreme Court not only rejected the insurer’s argument that the U.S. Supreme Court’s remand order would dictate the observance of a maximum ratio of 1:1, but set the punitive damages award at USD9 million, the highest possible single digit multiplier. Even though the Utah Supreme Court ruling was compliant with the outer limit (single digit ceiling) identified by the highest court of the land, it was inconsistent with the other considerations expressed by the U.S. Supreme Court; nevertheless, the latter declined to review its decision.
Given the relative subjectivity of the three guideposts elaborated by the Supreme Court in Gore, the generality of the additional guidance promulgated in Campbell, and sensitivities of the state courts toward interference by federal courts, it would have been unrealistic to expect state courts to adopt a consistent and uniform approach to multipliers in the wake of Campbell. Having said this, in numerous cases multipliers that were greater than 9 or 10 have been reduced to single digits (or strongly toward single digits in some cases). However, there have been outliers, notably in cases where individual smokers, or their estates, have successfully sued Big Tobacco defendants.
Along these lines, Philip Morris USA v. Williams9 is a particularly noteworthy case, because it did end up before the U.S. Supreme Court and was disposed of in a way that avoided the issue of constitutionally acceptable multipliers. In this case, an Oregon jury found that Jesse Williams’ death was caused by smoking and that Philip Morris, the manufacturer of the product of his choice, knowingly and falsely led him to believe that smoking was safe. The jury awarded USD821,000 in compensatory damages and USD79.5 million in punitive damages to Williams’ estate. The latter award was reduced by the trial court to USD32 million but reinstated by the Oregon Court of Appeals. The state Supreme Court rejected Philip Morris’ arguments that the trial court should have instructed the jury that it could not punish Philip Morris for injury to persons not before the court, and that the roughly 100-to-1 ratio, which the USD79.5 million award bore to the compensatory damages amount indicated a “grossly excessive” punitive award. The U.S. Supreme Court agreed with the respondent that a punitive damages award meant to punish a defendant (also) for injury inflicted on strangers to the litigation violates the due process guarantee. For this reason, the U.S. Supreme Court vacated the judgment of the Oregon Supreme Court and remanded the case for further proceedings. Since this might have led to the need for a new trial, or a change in the level of the punitive damages awards, the Court refrained from considering whether the award (roughly 100 times compensatory) was constitutionally “grossly excessive”.
In December 2008 the Oregon Court of Appeals once again reinstated the punitive damages award of USD79.5 million. On appeal the Oregon Supreme Court affirmed, also holding that courts may consider evidence of similar conduct to smokers in Oregon not party to the lawsuit when awarding punitive damages. Philip Morris then appealed again to the U.S. Supreme Court, arguing that the Oregon Supreme Court ignored the remand order of the U.S. Supreme Court. In March 2009 the U.S. Supreme Court in essence affirmed the lower court decision when it withdrew the writ of certiorari, as “improvidently granted”.10
In 2008 the U.S. Supreme Court had another opportunity to rule on punitive damages in the aftermath of the Exxon Valdez oil spill. In 1994 a jury had awarded compensatory damages of USD500 million as well as punitive damages of USD5 billion to almost 33,000 Alaska natives, landowners and commercial fishermen. The U.S. Court of Appeals for the 9th Circuit subsequently reduced the punitive damages award to USD2.5 billion. The U.S. Supreme Court, with a majority 5-3, ruled that the punitive damages awarded to the victims of the Exxon Valdez oil spill should be reduced to USD500 million.11 While the decision only dealt with (Federal) Maritime Law, it is widely believed to have broader implications.
Statutory law – caps and multipliers
A number of states have – sometimes as a general rule with exceptions, or in specific contexts (e.g. wrongful death only, certain types of defendants, such as municipalities, certain activities) – introduced caps on certain heads of damages. These measures have typically included absolute caps as well as maximum multipliers for punitive damages, with 3 being a typical multiplier.12
- Litigants sought punitive damages in 12% of the estimated 25,000 civil trials concluded in 2005.
- Punitive damages were sought in 10% of all tort trials; however, for certain case types including slander or libel, conversion, and intentional tort cases, punitive damages were requested in approximately 30% of trials.
- Punitive damages were awarded in 700 (5%) of the 14,359 trials where plaintiffs prevailed.
- Plaintiffs received punitive damages in 30% of the 1,761 civil trials in which these damages were requested and the plaintiff prevailed.
- The median punitive damage award was S64,000, and 13%of cases with punitive awards had damages of $1 million or more.
- In 76% of the 632 civil trials with both punitive and compensatory damages, the ratio of punitive to compensatory damages was 3 to 1 or less.
- Differences in punitive damages between bench and Jury trials were greater in contract cases than in tort cases.
- Litigants filed motions for post-trial relief in nearly half of civil trials with punitive damages and appeals in about a third of civil trials with punitive damages.
Source: “Punitive Damage Awards in State Courts, 2005”, Special Report published by the U.S. Department of Justice, Office of Justice Programs, Bureau of Justice Statistics, March 2011
Unfortunately, it is difficult to find comprehensive data on the frequency of punitive damages awards. The most recent comprehensive report, to our knowledge, was published by the U.S. Department of Justice in 2011, and was based on 2005 numbers.13 The “Highlights” section summarizes the salient points.
Insurance coverage in the U.S. (CGL and Umbrella)
General liability coverage in the U.S. is normally provided via the standard ISO CGL policy, the customary limit under which has been USD1 million per occurrence (subject to aggregate limits) for decades. Insureds requiring higher limits can purchase an Umbrella policy. This provides excess coverage on top of the CGL policy, the AL (Auto Liability) policy and the EL (Employers’ Liability) section of the WC/EL policy, as well as gap coverage from ground up. As respects punitive damages, the coverage situation under the CGL and the Umbrella policy can be summarized as follows:14
- Historically, the ISO CGL policy is “silent” in that the words “punitive damages” do not appear in the form.
- The use of the undefined term “damages” allows the inclusion of punitive damages, and the “all sums” language buttresses this proposition, as many courts have held.
- Then we have the issue of insurability under state law. While at least 17 states prohibit insuring the direct liability of the insured for punitive damages on the grounds that this would violate public policy, a solid majority of states consider vicarious liability insurable.
Based on the information contained in the Wilson Elser report15 the author has prepared the table below, which summarizes the insurability issue in a more transparent and user-friendly form.
Occasionally, U.S. insurers or foreign insurers insuring large U.S. risks use Bermuda forms, e.g. the XL 004 Integrated Occurrence Form. One feature of this form is that it explicitly affords coverage for punitive damages by including “punitive or exemplary damages” in the definition of “damages”. In order to make this Coverage Grant robust, the condition that stipulates the application of the internal laws of the State of New York makes an exception “insofar as such laws may prohibit payment in respect of punitive damages hereunder”, and stipulates that the internal laws of England and Wales shall apply in this regard, in lieu of New York law.
Insurance coverage internationally (CGL incl. excess CGL)
In some markets, policy wordings contain a general exclusion of punitive damages, i.e. the exclusion applies regardless of jurisdiction. This occurs notably in Common Law countries, where punitive damages exist in one form or another, and typically with a much narrower scope than in the U.S. Where this is not the case, General Liability policies typically feature an explicit exclusion of punitive damages for claims brought under U.S. jurisdiction.
U.S. awards can be scary indeed. Whenever an experienced liability underwriter – or claims person – comes across a manufacturer of automobiles, auto parts or tires with exports to the U.S. or even local production, the California verdict handed down in April 2001 in Lampe v. Continental General Tire Inc.16 springs to mind. This case did not involve an award for punitive damages. The award amounted to over USD55 million in total. It consisted of USD50 million alone to the catastrophically injured plaintiff (Cynthia Lampe: USD8,856,921 economic; USD41,000,000 noneconomic), and over USD5 million to her parents (Sylvia Cortez: USD5,575 economic; USD4,500,000 noneconomic. Joseph Cortez: USD1,000,000 non-economic). That award, made in a product liability lawsuit involving a blown tire, appeared shocking at the time in terms of single-person awards not involving punitive damages, but it would barely make it to the headlines today.
Against the background of such a large award for compensatory damages alone, punitive damages that come “on top” are a disastrous threat, notably if the sky is indeed the limit, as one was certainly entitled to fear until 1996 and beyond, given that things were still in flux for some time after Gore. The relative temperance imposed by the U.S. Supreme Court in the judgments to follow in 2003, 2007 and 2008 was badly needed.