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

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