Why pay $50,000 when you could pay $145 million?

• Author: Spendlove, Gretta
• Position: Of Counsel - Punitive damages

Avoiding Punitive Damage Claims

In October 2001, the Utah Supreme Court upheld a judgment for $145 million in punitive damages against State Farm Mutual Automobile Insurance Company. The judgment was granted in favor of State Farm's insureds, the Campbells. State Farm might have avoided that liability by paying $50,000.

In 1981, Curtis Campbell "unsafely" passed a car while driving up US 89 to Logan. One man, Ospital, was killed, and another, Slusher, was disabled, In the resulting lawsuit, Slusher offered to settle for Campbell's policy limit, $25,000. State Farm refused the offer and, according to the Utah Supreme Court decision in Campbell v. State Farm Mutual Automobile Insurance Company, assured Campbell he had no liability for the accident. State Farm took the case to trial, and judgments were entered against Campbell for $185,000. State Farm's attorney then suggested the Campbells put "for sale" signs on their property. Instead, they sued State Farm for bad faith failure to settle within insurance policy limits and damages for fraud and intentional infliction of emotional distress. They won, and were awarded both $1 million in compensatory damages and $145 million in punitive damages.

The Campbells also uncovered a nation-wide scheme by State Farm, to "meet corporate fiscal goals by capping payouts on claims company wide." They presented evidence that State Farm had changed the contents of files and lied to customers in order to meet financial goals.

What went so wrong that State Farm was hit with a $145 million punitive damage claim? How can other businesses avoid paying punitive damages?

What are punitive damages? Usually, damages are given to repay people for a loss they actually sustain. For instance, in a car accident, the victim might be paid for damage to the car, medical expenses and emotional distress. If the conduct of the perpetrator is particularly egregious, the court or jury may award additional "punitive damages" to punish the perpetrator and deter future bad acts. Punitive damages may be awarded in all sorts of cases, from those involving defective products (e.g. tobacco litigation and car safety cases) to insurance claims and securities fraud.

What are the criteria for awarding punitive damages? In the 1991 case of Crookston v. Fire Insurance Exchange, the Utah Supreme Court listed seven factors to consider in awarding punitive damages. These include the wealth of the defendant, the nature of misconduct, the facts...