CHAPTER 17 PUNITIVE DAMAGES AND INSURANCE

• Jurisdiction: United States
• Publication year: 2018

As discussed, punitive damages are designed to punish wrongdoers whose actions are more egregious than negligence. Insurance companies are not popular. As a result of the creation of the tort of bad faith in the 1950s, punitive damages have been assessed against insurance companies with glee by jurors and plaintiffs' lawyers. California statutory law provides that 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 plai1ntiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

"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 acted wrongfully, were spread among all insurers. Gigantic judgments were rampant. Failure to pay a $40 claim could, and did, result in $5 million judgments.

Insurers worked to limit the extent of punitive damages by claiming such damages were in violation of rights protected by the U.S. Constitution and its Due Process Clause. The U.S. Supreme Court was not pleased to hear the arguments and worked to make it difficult for the insurers. In Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991), Justice Blackmun wrote the opinion based upon a challenge to a punitive damages award that was the insurance company argued was "the product of unbridled jury discretion and . . . violative of its due process rights."²

Justice Blackmun pointed out that the members of the Supreme Court doubted the methods used to seek and obtain punitive damage in Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989); Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813 (1986); Newport v. Fact Concerts, Inc., 453 U.S. 247 (1981); Electrical Workers v. Foust, 442 U.S. 42 (1979); Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974); Rosenbloom v. Metromedia, Inc., 403 U.S. 29 (1971); Missouri Pac. Ry. Co. v. Tucker, 230 U.S. 340, (1913); Southwestern Telegraph & Telephone Co. v. Danaher, 238 U.S. 482, 491 (1915); and St. Louis, I. M. & S. R. Co. v. Williams, 251 U.S. 63, 67 (1919).

Punitive damages have long been a part of traditional state tort law . Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 255 (1984).

Under the traditional common-law approach, the amount of the punitive award is initially determined by a jury instructed to

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