The California Court of Appeal recently published another opinion about the Nickerson v. Stonebridge Life Insurance case. The court held to its maximum 10:1 punitive-to-compensatory-damages ratio and analyzed whether this ratio should consider attorneys’ fees incurred as a result of a bad-faith denial, which are sometimes referred to as Brandt fees.
On February 11, 2008, Thomas Nickerson—a paralyzed veteran—fell from his wheelchair and broke his leg. At the local Veterans’ Administration hospital, he was put in a sling that held his leg fully extended. Due to complications, he remained hospitalized until May 30.
Nickerson’s insurance policy with Stonebridge Life Insurance included “Accidental Daily Hospital Confinement Coverage,” which required Stonebridge to pay $350 for each day of hospital confinement. The policy defined “hospital confinement” as an inpatient stay for necessary treatment, and defined “necessary treatment” as medically necessary treatment at the “most economical” treatment site.
Stonebridge’s adjuster partially denied the claim on the basis of an independent medical review opinion, which stated that Nickerson could have been discharged to a “more economical” facility—such as a rehabilitation center or home with a caregiver—on February 29. A rebuttal letter from Nickerson’s physician explained that he could not be discharged until May 30 because his home could not accommodate Nickerson in his wheelchair with a full-extension cast. The insurer never provided to the independent medical reviewer, though.
Nickerson successfully sued for breach of contract and bad-faith handling of claims. The jury awarded Nickerson $31,500 in unpaid benefits, $35,000 in compensatory damages for bad faith, and $19 million in punitive damages. After the trial, the court reluctantly reduced the punitive-damages award to $350,000, citing California decisions which limit, as a matter of constitutional due process, punitive damages ratios so they are not “significantly greater” 9 or 10:1 absent special justification. Meanwhile, the parties stipulated to the amount of Brandt fees—attorneys’ fees incurred to combat a bad-faith denial—at $12,500.
Stonebridge appealed, asserting that punitive damages should have been further reduced. Nickerson also appealed, seeking a punitive-damages award that exceeded the 10:1 ratio and also arguing that the court should have included attorney fees in its calculation of the 10:1 ratio.
The original Court of Appeals decision affirmed the punitive damages award. It concluded that Stonebridge acted intentionally, deceitfully, and indifferently to its financially vulnerable insureds, but, citing due process, the Court of Appeals held that the 10:1 ratio established the maximum permissible punitive-damages award.
On further appeal, the California Supreme Court held that Brandt fees should have been incorporated when applying the 10:1 ratio. The Court explained that Brandt fees are damages arising from the bad-faith denial. And the fact that the parties had stipulated to Brandt fees rather than presented the issue to the jury was irrelevant. Finally, the Court of Appeals increased the punitive damages award to $475,000: ten times the compensatory damages of $35,000 plus the stipulated-upon Brandt fees of $12,500.
Some will see decisions like Nickerson—in which a maximum 10:1 punitive-to-compensatory-damages ratio is upheld despite challenging facts—as being a great result for insurers. Especially in the context of smaller claims, these decisions may not create a financial deterrence for insurers to take aggressive coverage positions. Even the trial court observed that the reduced punitive damages award would likely be insufficient to deter Stonebridge from continuing its practice. Nonetheless, others will continue to see any punitive damages award against insurers, no matter the ratio, as a defeat. Moving forward, how will insurers assess the risk as they formulate their coverage positions? Time will tell.
