In a recent case before the Second Appellate District, the California Court of Appeal addressed whether an award of punitive damages comported with due process following a life insurance company’s alleged fraud and intentional conduct toward a disabled veteran. At issue was whether the punitive damages award must be limited to no more than 10 times the compensatory damages award. The appellate court looked at the factors that determine an award of punitive damages, upholding a constitutional limit of 10:1 for punitive to compensatory damages awards.
Mr. Nickerson served in the United States Marines and was entitled to care at the Veterans Administration hospitals, with expenses paid. In 1997, Mr. Nickerson was involved in a snowmobile accident and as a result was paralyzed from the chest down. At the time of the incident, he relied on a wheelchair and was single, working as a live-in caretaker for other veterans. In exchange, he received free rent. He had a very small military pension.
While sitting in a motorized wheelchair, on a lift, waiting to be lowered from his van, Mr. Nickerson accidentally hit the control and lurched forward. He fell to the pavement, breaking his leg. He was taken to a VA Hospital in Long Beach and treated by Dr. Hung Nguyen. Mr. Nickerson remained at the hospital for 109 days.
Mr. Nickerson submitted a claim to Stonebridge Life Insurance Company after they partially denied his claim for hospitalization benefits. The trial court held that a policy provision that limited coverage was not plain, conspicuous, and clear and was not enforceable. Mr. Nickerson was entitled to $31,500 in additional benefits. The jury also found that Stonebridge had breached the implied covenant of good faith and fair dealing, awarding Mr. Nickerson $35,000 in compensatory damages for emotional distress. Mr. Nickerson was awarded $19 million in punitive damages, since the jury found that Stonebridge acted with fraud.
The Supreme Court then granted review to determine whether when determining whether the punitive damages award was constitutional, the appellate court properly excluded as compensatory damages the attorney fees award on the basis that it was awarded after the jury had rendered its verdict. The Supreme Court held that the fees should be included in the compensatory damages award.
In their discussion, the appellate court stated that punitive damages are imposed to further the state interest of punishing unlawful conduct and deterring its repetition. An amount of punitive damages offends due process when it is “grossly excessive.” Determining the maximum for a punitive damages award requires looking at the degree of reprehensibility of the misconduct, the difference between the actual or potential harm suffered by the plaintiff and the award, and the difference between the damages awarded by the jury and the civil penalties that may be imposed in a comparable case.
Turning to the reprehensibility of the defendant’s conduct, the court stated they look at five factors that assess the type of harm (physical or economic), whether the conduct involved repeated actions or was an isolated incident, and whether the harm resulted from malice, trickery, or deceit, among other factors. Mr. Nickerson did not suffer physical harm but economic harm. Stonebridge did act with a reckless disregard of Mr. Nickerson’s health and safety.
The court stated that Stonebridge refused to give Mr. Nickerson Dr. Nguyen’s letter and refused to recognize that Mr. Nickerson required the hospitalization for 109 days. The court stated their practice of using the “Necessary Treatment” limitation to deny policyholders’ claims is reprehensible, since this practice affects an insured’s hospitalization decisions.
Next, the court stated that the target of the conduct was financially vulnerable. Mr. Stonebridge had limited financial resources, and the proceeds from the Stonebridge policy would have replaced his 10-year-old van. The court also stated that the clause at issue, “Necessary Treatment,” is not clear and conspicuous, as required by California law.
The jury had found that Stonebridge intentionally misrepresented a material fact, intending to harm Mr. Nickerson. Here, the appellate court stated that four (of five) aggravating factors showed reprehensibility.
Turning to the constitutional analysis of damages, the court stated that the due process analysis is flexible and looks at the circumstances. In this case, Stonebridge showed a high level of reprehensibility. The $35,000 tort award to Mr. Nickerson did not contain a punitive element, since that compensated him for emotional distress. The appellate court stated the trial court properly remitted the jury award to the constitutional limit of a 10:1 ratio of punitive to compensatory damages.
In conclusion, the court affirmed the denial of the motion for judgment notwithstanding the verdict. The trial court was directed to modify the judgment, reducing the punitive damages award to $475,000.
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