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State Farm
Decision is Bad News for Property Owners
by Stuart Lieberman |
Many of you have been in the position of having to rely on
your insurance carrier. If you have a bad accident, or lose
your home to a flood or fire, you may be facing financial
hardship and counting heavily on your insurance policy to
respond.
Insurance companies reassure us that we are in good hand and
have a good neighbor, and often that proves to be the case.
But some insurers have been anything but good to some of their
policyholders. Now, your ability to fully recover from a
thoughtless carrier has been hampered by the U.S. Supreme
Court.
On April 7 of this year, the Court rejected a $145 million
punitive damages award in the case of
State Farm v. Campbell.
The Court found that the punitive damage award was so high
that it was unconstitutional.
The policyholder was involved in a serious accident that left
one dead and another disabled. State Farm refused to settle
the case for the mere $50 thousand policy limit and contrary
to the advice of its own adjuster, took the case to trial. The
jury returned a judgment that was three times the policy
limit, which personally exposed the policy holder.
As usually follows in these kinds of cases, Mr. Campbell sued
his insurer for bad faith failing to settle the case for the
$50 thousand policy limit. A Utah jury returned a judgment
against State Farm for $1 million in compensatory damages, and
$145 million in punitive damages.
Now, the U.S. Supreme Court has ruled that this punitive
damages assessment is too high. It was particularly troubled
by the fact that the jury considered State Farm's general,
nationwide claims handling practices. The scope of
consideration should have been narrower, the Court ruled. And
the ratio of punitive to compensatory damages, 145 to 1, was
simply too high.
I am greatly troubled by this decision. I believe that the
purpose of punitive damages, which is to punish and deter
wrongdoers , was met with the $145
million award. State Farm is a large company. It has always
been reasonable to ask "how much will it take for this
particular company to 'get the message?'" Obviously, a mere
slap on the wrist will not do the job.
The facts in that case were particularly troubling, suggesting
a pattern of improper claims handling procedures. At least
that is what was reported, I certainly do not know if this is
true. That is of special concern for people who are sometimes
forced to rely on the honesty and good will of their insurance
carrier. If it was true that this company did not meet its
responsibilities, it would have been fair to punish the
company at a sufficient level so as to send the message home.
A mere $1 million dollar hit will probably not do.
What I am most concerned about is the ratio issue. The Court
did not like the 145-1 ratio, 1 being the amount of
compensatory damages - in other words, how much Mr. Campbell
was out of pocket. If he were out more, perhaps the 145
million figure would have been
upheld. Does that mean that insurers can treat small claimants
poorly and not worry about it, simply because the claims are
relatively small (although a million dollars is still a lot to
most of us!) I think this is a
dangerous message.
Homeowners often are required to file claims with there
carriers and must often confront these kinds of issues. In my
field, environmental law, claims are often filed for tank
leaks, environmental spills, and other problems. Commercial
clients often have large environmental claims. And this case
applies to all policyholder laims, not just auto
policyholders.
I think the Campbell case is too pro-business, pro insurance
industry. For the rest of us, it is not great news.
Published: April 17, 2003 |
