Bad Faith - Ninth Circuit Vacates $10 Million Punitive Award Involving Disability Insurance Claim
The U.S. Court of Appeals for the Ninth Circuit recently vacated a $10 million punitive damage award in a bad faith action involving an insurer’s denial of a disability insurance claim. The Ninth Circuit held that the district
court violated the principles set forth in Philip Morris USA v. Williams by failing to instruct the jury that it could not punish the defendants for conduct that harmed only nonparties.
In Merrick v. Paul Revere Life Insurance Co., Nos. 05-16380, 05-17059 (9th Cir. Aug. 31, 2007), the insured, Merrick, sought coverage from defendant Paul Revere under a disability policy. Paul Revere initially made payments
to Merrick under the policy, but then offered a compromise settlement and later denied coverage based on new information and an intensive review of the claim file regarding Merrick’s illness. Merrick subsequently filed suit
against Paul Revere and its parent corporation, Unum Provident, claiming breach of contract and of the duty of good faith and fair dealing.
At trial, Merrick relied on the testimony of an insurance industry expert to argue that his claim was denied as part of a larger scheme to “scrub” Paul Revere’s liability for claims under similar disability policies.
Merrick’s expert testified that Paul Revere’s parent company imported its “best practices” to Paul Revere following the merger of the two companies, which included allegedly aggressive and unethical claim-closing
practices. The expert also testified that Merrick’s claim was handled consistently with Unum’s practices. The jury ultimately awarded Merrick $1.65 million in compensatory and $10 million in punitive damages.
On appeal, one of the primary issues was the district court’s denial of the insurers’ request for a jury instruction specifying that that the jury could consider only specific conduct by the defendants that injured
the plaintiff, not conduct that may have injured nonparties. According to the insurers, the court’s denial of this instruction violated their Due Process rights by exposing them to unconstitutionally excessive punitive damages
liability.
The Ninth Circuit agreed. Citing Philip Morris USA v. Williams, it noted that the “Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that is inflicted upon nonparties.”
Under Williams, “a plaintiff may offer evidence of harm to other victims to show the reprehensibility of a defendant’s harm in this case,” but “a jury may not . . . use a punitive damages verdict
to punish a defendant directly on account of harms it is alleged to have visited on nonparties.” Where the possibility of harm to defendants exists, a court “must provide some form of protection” to assure that
juries are considering the proper question.
According to the Ninth Circuit, the evidence at trial created the “significant risk” contemplated in Williams. It held that the district court erred in failing to instruct the jury that it could not punish
defendants for harm done to other parties and invited the sort of “improper jury speculation” that Williams sought to avoid. On this basis, the court vacated the punitive damages award and remanded the case
for a new trial on punitive damages.