Punitive damages – some reason at last

by Peter O'Donahoo and Vida Wongseelashote

The State Farm Mutual Automobile Insurance Co v Campbell decision

Commonly referred to as 'exemplary damages' in Australia, punitive damages are damages awarded in addition to compensatory damages. Their purpose is to punish defendants for reprehensible conduct and deter them from engaging in such conduct in the future. In this respect they are no different from criminal penalties. However, as the majority noted in State Farm Insurance Co v Campbell1 (State Farm), 'defendants subjected to punitive damages in civil cases have not been accorded the protections applicable in a criminal proceeding', and may therefore be arbitrarily deprived of their property.

Below we examine the State Farm decision and review the current Australian position on exemplary damages.

The facts of the case

State Farm involved a punitive damages award of US$145 million against the State Farm Mutual Automobile Insurance Company (State Farm Insurance) for its handling of the claims of the Campbells.

In 1981 the Campbells were involved in a motor vehicle accident. Mr Campbell was the driver. He decided to overtake six vans while travelling on a two lane highway. Approaching from the other direction, another driver, Mr Ospital took evasive action, lost control of his vehicle and collided with a vehicle driven by a Mr Slusher. Mr Ospital was killed and Mr Slusher permanently disabled. The Campbells were uninjured.

Mr Campbell was insured by State Farm Insurance under a US$50,000 motor vehicle policy.

Legal proceedings were commenced on behalf of Mr Ospital and Mr Slusher against Mr Campbell in the Utah State Court. State Farm Insurance assumed the conduct of the defence. State Farm Insurance declined offers to settle the legal proceedings – within the limits of the policy – and despite the advice of its own investigators, contested liability. State Farm Insurance assured the Campbells that 'their assets were safe, that [State Farm Insurance] would represent their interests, and that they did not need to procure separate counsel.'

Following the trial, the jury returned a verdict of US$185,000 – far in excess of the policy limits and what had been offered during negotiations.

State Farm Insurance informed the Campbells that it would not cover the excess liability above the policy limit. (It was suggested to the Campbells, by their insurer, that they may wish to sell their home.)

These events led to the Campbells retaining their own lawyers and filing proceedings in the Utah State Court against State Farm Insurance alleging bad faith, fraud and intentional infliction of emotional distress.

At the end of the hearing, the jury returned a verdict of US$2.6 million compensatory damages and US$145 million in punitive damages. (The trial court reduced this to US$1 million and US$25 million respectively.) Both parties appealed.
The Utah Supreme Court, relying heavily upon:

  • evidence concerning State Farm Insurance's questionable national scheme to meet corporate fiscal goals by capping payouts on claims (the PP&R Policy);


  • the 'massive wealth' of State Farm Insurance; and


  • 'testimony indicating that "State Farm [Insurance's] actions, because of their clandestine nature, will be punished at most in one out of every 50,000 cases as a matter of statistical probability"',
    reinstated the US$145 million punitive damages award.


  • The Utah Supreme Court noted that the punitive damages award was not excessive when compared to various civil and criminal penalties State Farm Insurance could have faced for its nationwide practices.

    State Farm Insurance appealed to the United States Supreme Court, seeking certiorari of the State Court's decision. The question for the United States Supreme Court was whether, in the circumstances, an award of US$145 million in punitive damages, where compensatory damages were US$1 million, was excessive and unconstitutional in that the award violated the Due Process Clause of the Fourteenth Amendment to the US Constitution.

    By majority, the United States Supreme Court ruled that the punitive damages award did violate the Due Process Clause, reversed the decision of the Utah Supreme Court, and remanded the matter back to the Utah State Court.

    The majority opinion

    The majority opinion was delivered by Justice Kennedy (joined by Chief Justice Rehnquist and Justices Stevens, O'Connor, Souter and Breyer).

    The majority referred to the Supreme Court's earlier decision in BMW v Gore in which it identified three guideposts (the Gore guideposts) to be used when reviewing punitive damages, namely:

  • the degree of reprehensibility of the defendant's misconduct;


  • the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and


  • the difference between the punitive damages awarded by the jury and the civil penalties authorised or imposed in comparable cases.


  • In respect of the first Gore guidepost, the majority acknowledged that conduct by State Farm Insurance was reprehensible enough to warrant a punitive damages award, but was not convinced the State's objectives could not have been satisfied by a more modest punishment. In determining the degree of reprehensibility of conduct by State Farm Insurance, the majority refused to take into account the perceived deficiencies of the PP&R Policy throughout the country. The Campbells argued that such evidence was used merely to demonstrate the motives of State Farm Insurance against its insured, but the majority held that in relying on such evidence, the Utah courts awarded punitive damages for conduct that bore no relation to the Campbell's harm. Further, the majority stated that States cannot punish a defendant for conduct that may have been lawful where it occurred, or impose punitive damages to punish a defendant for unlawful acts outside its jurisdiction. The reprehensibility of conduct by State Farm was therefore restricted by the majority to the conduct that harmed the Campbells.

    The second Gore guidepost requires the measure of punishment to be both reasonable and proportionate to the amount of harm suffered by the plaintiff and to the general damages awarded. The majority did not identify concrete constitutional limits on the ratio of harm suffered to the punitive damages award, but did state that in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process. This means that punitive damages awards should be, at most, no greater than nine times the amount of compensatory damages awards. However, the majority were reluctant to make single-digit ratios a rigid benchmark, citing that ratios greater than 9:1 may be required where 'a particularly egregious act has resulted in only a small amount of economic damages' or where the injury is hard to detect or the monetary value of non-economic harm might be difficult to determine. Nonetheless, it appears that a presumption may be had against awards with larger ratios.

    In light of the harm suffered by the Campbells, the majority criticised the proportionality of the punitive damages award to the compensatory damages award as the Campbells had suffered only minor economic losses and a year and a half of emotional distress arising from an economic transaction and not from some physical assault or trauma. Citing the Restatement (Second) of Torts, the majority agreed that in many cases compensatory damages often include an amount for emotional distress caused by the defendant's conduct.

    In relation to the third Gore guidepost, the majority considered the most relevant civil sanction under Utah state law for the wrong done to the Campbells to be a $10,000 fine. It refused to speculate about the broad fraudulent scheme drawn from evidence of out-of-state and dissimilar conduct and held that such an analysis was insufficient to justify the punitive damages award.

    The minority opinion

    The minority comprised Justices Scalia, Thomas and Ginsburg, who each delivered separate dissenting judgments.

    The minority were of the opinion that the US Constitution does not impose limits on the size of punitive damages awards, and were critical of the authorities relied upon by the majority to justify their foray into 'territory traditionally within the States' domain'.

    Much weight was also given to the conduct by State Farm Insurance, particularly in relation to the national PP&R Policy. They accepted the Campbell's argument that their experience with State Farm Insurance exemplified and reflected an overarching underpayment scheme, which caused repeated misconduct of the sort that injured them, and treated the evidence of out-of-state conduct as probative and demonstrative of the deliberateness and culpability of action by State Farm Insurance. It was therefore concluded that a clear nexus existed between these actions and the harm suffered by the Campbells.

    The Australian position in relation to punitive damages

    It is not possible to discern any pattern in the quantum of awards of punitive or exemplary damages in Australia other than that they have never been as inflated as their American counterparts, tending to run at the higher end into the hundreds of thousands rather than into the millions of dollars.

    Exemplary damages are awarded only in circumstances where the defendant has acted in 'contumelious disregard' of the rights of the plaintiff, and with the social purpose of teaching a wrongdoer that 'tort does not pay'. They may also serve to assuage any urge for revenge felt by the victims. In assessing the amount of the exemplary award, courts will have regard to all of the circumstances of the case, including:

  • the means of the defendant (an award should be able to be 'felt' by the defendant);


  • the plaintiff's provocation of the defendant's conduct; and


  • the extent of any punishment that has already been inflicted on the defendant.


  • Just as in the US, Australian courts require a close factual link between the conduct complained of and the conduct constituting the cause of action to which it is attached. However, Australian courts do not refer to ratios or multipliers, or use any system similar to the Gore guideposts when determining the size of an exemplary damages award. The Gore guideposts are, nevertheless largely reflected in the considerations that courts and juries must take into account when doing so. For example, while it has been stated that there is no necessary proportionality between the assessment of compensatory damages and exemplary damages,2 regard must be given as to what criminal penalties might have been imposed if the conduct had been criminal, and the degree of reprehensibility of the conduct.

    There is also some guidance as to how juries should be directed on this issue, namely that:

  • they should display restraint when assessing the quantum of the award;


  • they should be fully aware of the danger of an excessive award; and


  • exemplary damages will be awarded if, but only if, they are satisfied that the quantum of compensatory damages does not contain any sufficient element of punitive damages.


  • References
    1. (2002) 123 S. Ct. 1513, 7 April 2003
    2. XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448, 471.


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