Double Impact

Pennsylvania’s bad faith statute provides, in part: “In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may — award punitive damages against the insurer —.” 42 Pa. C.S.A. §8371 (emphasis added). Since its enactment in 1990, there has been considerable debate over whether the term “the court” refers to a judge or a jury.

That question was definitively decided, at least for first-party bad faith actions brought in state court, by the Pennsylvania Supreme Court in Mishoe v. Erie Insurance Co. In a split 3-2 decision, the Supreme Court ruled that litigants do not have a right to demand a jury trial in a case brought in state court under 42 Pa.C.S.A. §8371. Under Mishoe, the issues of bad faith and punitive damages are to be determined by the trial judge, as are any claims for interest, costs and attorney fees.

Mishoe was a consolidated appeal involving two bad faith lawsuits instituted after the respective policyholders had resolved underinsured motorist (UIM) claims. In each of the underlying cases, the UIM arbitration panel awarded damages that were substantially greater than the previous settlement offers made by the respective insurers. In the bad faith lawsuits, the companies had successfully moved to strike plaintiffs’ demands for a jury trial.

In the appeal, the plaintiffs mounted a two-pronged attack, arguing that by its language, §8371 provides for a right to a jury trial and, further, that the Pennsylvania Constitution guaranteed the right to a jury trial. The Supreme Court began its analysis by revisiting its decision in Wertz v. Chapman Township, 741 A.2d 1272 (Pa. 1999), a case decided under the Pennsylvania Human Relations Act (PHRA), Act of October 27, 1955, P.L. 744, as amended, 43 P.S. §§951-962-2.

The PHRA provides that, “[I]f the court finds that the respondent has engaged in such discriminatory practices charged in the complaint, the court shall enjoin the respondent from engaging in such unlawful discriminatory practice and order affirmative action —.” 43 P.S. §962(c) (3). The Supreme Court in Wertz held that the General Assembly’s use of the term “court” in the PHRA meant a judge and not a jury.

In Mishoe, the Supreme Court applied its analysis in Wertz to §8371, the bad faith statute, as follows: “Significantly, in §8371, as in the PHRA, the General Assembly is silent regarding the right to a jury trial. — In addition, the legislature chose to use the term ‘court’ in §8371 rather than ‘jury.’ — Finally, there is no legislative history supporting the position that a §8371plaintiff is entitled to a jury trial. — Accordingly, the very factors that led [the Supreme Court] to conclude that there was no right to a jury trial in Wertz are also present in this case.” Mishoe at *3.

The plaintiffs in Mishoe further argued that §8371 afforded them the right to a jury trial because that statute allowed the potential imposition of punitive damages and, historically in Pennsylvania, punitive damages have been determined by jury. The court was reluctant to accept this argument as providing the sole basis for the right to a jury trial, however, given that the General Assembly made no reference to an adherence to that tradition in §8371. Further belying this argument, according to the court, was the fact that judges regularly award punitive damages where the right to a jury trial is waived in favor of a bench trial.

The Mishoe plaintiffs’ final argument was that the Pennsylvania Constitution guaranteed them the right to a jury trial for claims brought pursuant to §8371. The applicable constitutional provision provides, in part, that “trial by jury shall be as heretofore, and the right thereof remain inviolate.” Pa. Const. Art. 1, §6. Relying upon an earlier case, D’Ambrosio v. Pennsylvania National Mutual Casualty Insurance Co., 431 A.2d 966 (Pa. 1981), in which the Supreme Court had refused to recognize a common law tort cause of action for bad faith on the part of an insured in the first-party benefits context, the court in Mishoe concluded that “the bad faith cause of action that is codified in §8371 did not exist prior to the enactment of that statute and certainly did not exist at the time the Pennsylvania Constitution was adopted.” Id. at *6. The court also rejected plaintiffs’ contention that §8371 was merely an additional remedy that codified the common law regarding bad faith.

Campbell

As a general rule, the availability of punitive damages is a creature of state court law, with such damages usually being imposed by state court juries. However, over the past decade, federal constitutional challenges have been made to what are perceived as excessive punitive awards. In the landmark decision in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), the U.S. Supreme Court vacated a $2 million punitive damages award in the face of $4,000 in actual damages, finding that the punitive award was so “grossly excessive” that it violated constitutional due process and setting forth three “guideposts” for assessing whether a punitive damage award was unconstitutionally excessive: (1) The degree of reprehensibility of the defendant’s conduct; (2) The disparity between the actual or potential harm suffered by the plaintiff and the punitive damage award; and (3) The difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

State Farm Mutual Life Insurance Co. v. Campbell arose out of a car accident allegedly caused by State Farm’s policyholder, Curtis Campbell, which resulted in the death of one driver and serious injury to another driver. In the third-party action against Campbell, both plaintiffs offered to settle within policy limits, but State Farm rejected the offers and litigated the case, which resulted in an excess verdict. State Farm appealed the excess judgment and, after it was affirmed, paid it in full.

In the subsequent bad faith litigation, the plaintiffs, assignees of Campbell, alleged that State Farm acted in bad faith by encouraging claims handlers to use allegedly improper means to reduce claim payments — allegations that State Farm disputed. The jury found State Farm liable for bad faith, fraud and intentional infliction of emotional distress, awarding approximately $900 in economic damages (the amount the Campbells paid their personal attorneys), $2.6 million in damages for mental anguish and $145 million in punitive damages. After the Utah Supreme Court affirmed the punitive award, State Farm appealed to the U.S. Supreme Court.

After much deliberation, the U.S. Supreme Court vacated the punitive damage award of $145 million, finding the issues before it to be “neither close nor difficult.” In its analysis, the Campbell court applied the three Gore “guideposts.”

Turning to the first guidepost, the Supreme Court detailed a number of factors to be considered in evaluating the reprehensibility of the insurer’s conduct, including whether the harm caused was physical as opposed to economic; whether the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; whether the target of the conduct had financial vulnerability; whether the conduct involved repeated actions or was an isolated incident; and whether the harm was the result of intentional malice, trickery or deceit, or mere accident. In the Supreme Court’s opinion, the justices said: “The existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a punitive damage award; and the absence of all of them renders any award suspect.” Campbell at *21.

Addressing the specific facts in Campbell, the court held that although it was critical of the insurer’s handling of the third-party claims against Campbell, “a more modest punishment for this reprehensible conduct could have satisfied the State’s legitimate objectives, and the Utah courts should have gone no further.” Id. at *21-*22.

The Supreme Court criticized punitive awards designed to punish conduct apart from that specifically before the factfinder, such as conduct in other matters outside the forum state, or actions involving non-parties to the litigation. On this point, the court stated, “Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis —.” Id. at *27. According to the court, “A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business.” Id. at *27.

The constitutional analysis also has a geographical limit, according to the court, because as a general rule a state did not have “a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the state’s jurisdiction.” Id. at 25.

Turning to the second Gore guidepost, the ratio between the compensatory award and the punitive damages award, the Supreme Court went further than it had ever gone before in suggesting a ratio which a punitive damages award should not exceed. The court traced the 700-year history of civil litigation awards designed to sanction and found them largely limited to double, treble or quadruple damages. In fact, according to the court, “[o]ur jurisprudence and the principles it has now established demonstrate — that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Id. at *31. Acknowledging that a higher ratio may be upheld where “a particularly egregious act has resulted in only a small amount of economic damages,” the court added, importantly, that “[t]he converse is also true. — When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outer most limit of the due process guaranteed.” Id.

The court held that the 145:1 ratio applicable in Campbell violated due process. Noting that the Campbells had been awarded $1 million for a year and a half of emotional distress, the court held that, “[a] application of the Gore guideposts to the facts of this case, especially in light of the substantial compensatory damages awarded (a portion of which contained a punitive element), likely would justify a punitive damages award at or near the amount of compensatory damages.” Id. at *37-*38.

Addressing the third Gore guidepost, comparing the punitive damages award to civil penalties permissible in comparable cases, the court cautioned against using the civil process to assess criminal penalties, holding that application of this guidepost should focus on a penalty the defendant realistically could have expected to face, and not the highest penalty theoretically possible. The court held that the most relevant civil sanction under Utah state law was a $10,000 fine for an act of fraud, which, the court reasoned, was far from the punitive award upheld by the Utah Supreme Court.

Discussion