Bad Faith - Oregon Supreme Court Holds That 16-to-1 Punitive Damages Award In Bad Faith Action Violates Due Process
Last Thursday, the Oregon Supreme Court in Goddard v. Farmers Insurance Company of Oregon, No. S053405 (March 6, 2008) held that a $20 million award of punitive damages in a bad faith action violated due process. Goddard determined
that this award, which was more than sixteen times the compensatory damages, could not exceed a four-to-one ratio under Campbell and Gore.
Goddard arose from a wrongful death action against Farmers’ insured that resulted in an adverse judgment in excess of policy limits. The insured alleged that Farmers acted in bad faith in failing to settle the wrongful
death action. Subsequently, a jury found that Farmers acted in bad faith by manipulating the claims evaluation process, exposing its insured to an excess verdict. The jury awarded the plaintiff $863,274 in compensatory damages and
over $20 million in punitive damages. The Oregon Court of Appeals later reduced the punitive damages award to three times the amount of compensatory damages. After plaintiff sought review, the Oregon Supreme Court granted plaintiff’s
petition for the purpose of considering the punitive damages ruling.
In applying the three “guideposts” identified by Campbell and Gore, the Oregon Supreme Court noted that the second guidepost (i.e., the disparity between the actual or potential harm suffered
by the plaintiff and the punitive damages award) offered a “rough numerical baseline” by establishing that due process will normally not permit a punitive damages award in excess of a single-digit ratio. The court recognized
that this framework was “amorphous” and offered “one refinement in the hope of making it less so.” It stated that “as a very general rule of thumb, the federal constitution prohibits any punitive
damages award that significantly exceeds four times the amount of the injured party’s compensatory damages, as long as the injuries caused by the defendants were economic, not physical.” The court determined that this
ratio governed plaintiff’s claim because, although plaintiff argued that an insured in such circumstances is denied peace of mind and almost certainly suffers emotional and even physical trauma as a result, the instructions
and verdict form in the trial court did not authorize the jury to award damages for physical injury or emotional distress.
Turning to the other two guideposts, the Goddard court found that Farmers’ behavior was “very reprehensible” because Farmers knew of its insured’s vulnerability, acted with malice, and its conduct
involved repeated actions. The court also examined the civil sanctions available and determined that Oregon law provided for relatively severe penalties. Citing the reprehensibility of the insurer’s conduct as well as the
availability of fairly high civil sanctions, the Court held that a ratio of four-to-one was appropriate. It stated that “[t]here may be possible courses of behavior in the area of economic wrong that would be even worse, but
none leaps to mind” and accordingly modified the Court of Appeals’ opinion to allow “the highest permissible award . . . four times the amount of plaintiff’s actual and potential harm . . .” The
court remanded the case with the instruction that the trial court should grant a new trial unless plaintiff agreed to an amended judgment reducing the punitive damages to this amount.