Punitives of Ten Times the Compensatory Damages Held Unconstitutional

Punitives of Ten Times the Compensatory Damages Held Unconstitutional


In Amerigraphics, Inc. v. Mercury Casualty Company, __ Cal.Rptr.3d ___, 2010 WL 1038675 (3/23/10), a California Court of Appeal addressed the “ratio” of punitive to compensatory damages, finding, on the facts before it, that although a ratio of 10 to 1 was unconstitutional, a ratio of 3.8 to 1 would pass muster. While the Court held that only compensatory damages may be used as the basis for the punitive damages multiplier, the Court otherwise did not provide guidance for determining punitive damages against an insurer found to have acted in bad faith.
The insured suffered flood and business interruption losses. Mercury made unsupported coverage denials and delayed the claim for over a year. The insured eventually went out of business. The jury awarded $130,000 in compensatory damages and $3 million in punitive damages. The trial court reduced the punitive award to $1.7 million.

The Court held that the amount of the punitive award was constitutionally excessive and violated due process. Instead, the Court determined (seemingly arbitrarily) that $500,000 was appropriate and that the resulting ratio of 3.8 to 1 of punitive to compensatory damages bore a reasonable relation to the harm caused by Mercury.

According to the Court, only the compensatory damages amount, not Brandt fees (attorneys’ fees incurred by the insured to obtain coverage from an insurer found to have committed bad faith), prejudgment interest, or unforeseeable potential injury damages, may be used as the punitive damages multiplier.

Starting with the factors articulated in State Farm Mutual Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003) (i.e., “(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases”), the Court stressed that the first factor is the most important and that to test “reprehensiveness,” a court must consider whether : “[1] the harm caused was physical as opposed to economic; [2] the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; [3] the target of the conduct had financial vulnerability; [4] the conduct involved repeated actions or was an isolated incident; and [5] the harm was the result of intentional malice, trickery, or deceit, or mere accident.”

The Court noted that the harm in this case was economic, not physical, and that there were no issues of health and safety. The Court observed that the insured had told Mercury of its severe financial distress and that the insured went out of business because of Mercury’s misconduct. However, the Court found no evidence of "intentional malice" and that Mercury’s multiple acts of improper claims handling did not make Mercury a "repeat offender" because its misconduct related to only one insured and one claim.