CHAPTER 15

• Jurisdiction: United States

CHAPTER 15

Punitive Damages

Punitive damages are designed to punish wrong doers whose actions are more egregious than negligence. In a tort action, if it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

(1) “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others. (2)“Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights. (3)“Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.¹

The unintended consequence of the tort of bad faith is the effect that punitive damages have had on the insurance industry and those who purchase insurance. The cost of punitive damage awards, designed to punish insurers who act wrongfully, was spread among all insurers. Insurers worked to limit the extent of punitive damages by claiming such damages were in violation of rights protected by the due process clause of the U.S. Constitution.

As you read the following case, ask whether the actions of the court in Alabama treated the insurer fairly and equally to that provided to other litigants. Read Justice O’Connor’s dissent and consider whether punitive damages are subject to the due process clause or are, as Justice Scalia said, so well regarded and ancient as to not require change.

Pacific Mut. Life Ins. Co. v. Haslip
499 U.S. 1 (1991)

BLACKMUN delivered the opinion of the Court.

This case is yet another that presents a challenge to a punitive damages award.

I

In 1981, Lemmie L. Ruffin, Jr., was an Alabama-licensed agent for petitioner Pacific Mutual Life Insurance Company. He also was a licensed agent for Union Fidelity Life Insurance Company. Pacific Mutual and Union are distinct and nonaffiliated entities. Union wrote group health insurance for municipalities. Pacific Mutual did not.

Respondents Cleopatra Haslip, Cynthia Craig, Alma M. Calhoun, and Eddie Hargrove were employees of Roosevelt City, an Alabama municipality. Ruffin, presenting himself as an agent of Pacific Mutual, solicited the city for both health and life insurance for its employees. The city was interested. Ruffin gave the city a single proposal for both coverages. The city approved and, in August 1981, Ruffin prepared separate applications for the city and its employees for group health with Union and for individual life policies with Pacific Mutual. This packaging of health insurance with life insurance, although from different and unrelated insurers, was not unusual. Indeed, it tended to boost life insurance sales by minimizing the loss of customers who wished to have both health and life protection. The initial premium payments were taken by Ruffin and submitted to the insurers with the applications. Thus far, nothing is claimed to have been out of line. Respondents were among those with the health coverage.

An arrangement was made for Union to send its billings for health premiums to Ruffin at Pacific Mutual’s Birmingham office. Premium payments were to be effected through payroll deductions. The city clerk each month issued a check for those premiums. The check was sent to Ruffin or picked up by him. He, however, did not remit to Union the premium payments received from the city; instead, he misappropriated most of them. In late 1981, when Union did not receive payment, it sent notices of lapsed health coverage to respondents in care of Ruffin and Patrick Lupia, Pacific Mutual’s agent-in-charge of its Birmingham office. Those notices were not forwarded to respondents. Although there is some evidence to the contrary, see Reply Brief for Petitioner B1-B4, the trial court found, App. to Pet. for Cert. A2, that respondents did not know that their health policies had been canceled.

II

Respondent Haslip was hospitalized on January 23, 1982. She incurred hospital and physician’s charges. Because the hospital could not confirm health coverage, it required Haslip, upon her discharge, to make a payment upon her bill. Her physician, when he was not paid, placed her account with a collection agency. The agency obtained a judgment against Haslip, and her credit was adversely affected.

In May 1982, respondents filed this suit, naming as defendants Pacific Mutual (but not Union) and Ruffin, individually and as a proprietorship, in the Circuit Court for Jefferson County, Ala. It was alleged that Ruffin collected premiums but failed to remit them to the insurers so that respondents’ respective health insurance policies lapsed without their knowledge. Damages for fraud were claimed. The case against Pacific Mutual was submitted to the jury under a theory of respondeat superior.

Following the trial court’s charge on liability, the jury was instructed that if it determined there was liability for fraud, it could award punitive damages. That part of the instructions is set forth in the margin.² Pacific Mutual made no objection on the ground of lack of specificity in the instructions, and it did not propose a more particularized charge. No evidence was introduced as to Pacific Mutual’s financial worth. The jury returned general verdicts for respondents against Pacific Mutual and Ruffin in the following amounts: Haslip:³ $1,040,000 Calhoun: $15,290 Craig: $12,400 Hargrove: $10,288

Judgments were entered accordingly.

On Pacific Mutual’s appeal, the Supreme Court of Alabama, by a divided vote, affirmed. 553 So. 2d 537 (1989). In addition to issues now before us, the court ruled that, while punitive damages are not recoverable in Alabama for misrepresentation made innocently or by mistake, they are recoverable for deceit or willful fraud, and that on the evidence in this case a jury could not have concluded that Ruffin’s misrepresentations were made either innocently or mistakenly. Id., at 540. The majority then specifically upheld the punitive damages award. Id., at 543.

One Justice concurred in the result without opinion.⁴ Ibid. Two Justices dissented in part on the ground that the award of punitive damages violated Pacific Mutual’s due process rights under the Fourteenth Amendment. Id., at 544-545.

Pacific Mutual, but not Ruffin, then brought the case here. It challenged punitive damages in Alabama as the product of unbridled jury discretion and as violative of its due process rights. We stayed enforcement of the Haslip judgment, 493 U.S. 1014 (1990), and then granted certiorari, 494 U.S. 1065 (1990), to review the punitive damages procedures and award in the light of the long-enduring debate about their propriety.⁵

III

This Court and individual Justices thereof on a number of occasions in recent years have expressed doubts about the constitutionality of certain punitive damages awards.

In Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989), all nine participating Members of the Court noted concern. In that case, punitive damages awarded on a state-law claim were challenged under the Eighth and Fourteenth Amendments and on federal common-law grounds. The majority held that the Excessive Fines Clause of the Eighth Amendment did not apply to a punitive damages award in a civil case between private parties; that the claim of excessiveness under the Due Process Clause of the Fourteenth Amendment had not been raised in either the District Court or the Court of Appeals and therefore was not to be considered here; and that federal common law did not provide a basis for disturbing the jury’s punitive damages award. The Court said:

“The parties agree that due process imposes some limits on jury awards of punitive damages, and it is not disputed that a jury award may not be upheld if it was the product of bias or passion, or if it was reached in proceedings lacking the basic elements of fundamental fairness. But petitioners make no claim that the proceedings themselves were unfair, or that the jury was biased or blinded by emotion or prejudice. Instead, they seek further due process protections, addressed directly to the size of the damages award. There is some authority in our opinions for the view that the Due Process Clause places outer limits on the size of a civil damages award made pursuant to a statutory scheme . . . but we have never addressed the precise question presented here: whether due process acts as a check on undue jury discretion to award punitive damages in the absence of any express statutory limit. . . . That inquiry must await another day.” Id., at 276-277.

Justice Brennan, joined by Justice Marshall, wrote separately:

“I join the Court’s opinion on the understanding that it leaves the door open for a holding that the Due Process Clause constrains the imposition of punitive damages in civil cases brought by private parties. . . .

“Without statutory (or at least common-law) standards for the determination of how large an award of punitive damages is appropriate in a given case, juries are left largely to themselves in making this important, and potentially devastating, decision.

. . .

“Since the Court correctly concludes that Browning-Ferris’ challenge based on the Due Process Clause is not properly before us, however, I leave fuller discussion of these matters for another day.” Id., at 280-282.

Justice O’Connor, joined by Justice Stevens, concurring in part and dissenting in part, observed:

“Awards of punitive damages are skyrocketing. . . .

“. . . I do . . . agree with the Court that no due process claims—either procedural or substantive—are properly presented in this case, and that the award of

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