In Nickerson v. Stonebridge Life Ins. Co. (No. B234271A, filed 11/3/16), (“Nickerson II”) a California appeals court outlined the requirements for complying with the single-digit multiplier annunciated as a Constitutional limitation on punitive damages by the United States Supreme Court in State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, for awards of punitive damages against insurers in cases of extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages.
Nickerson II followed remand from the California Supreme Court’s ruling in Nickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal.4th 363 (“Nickerson I”), that an award of attorney’s fees in an insurance bad faith case under Brandt v. Superior Court (1985) 37 Cal.3d 813, should be included in the calculation of the ratio of punitive to compensatory damages, regardless of whether the fees are awarded by the trier of fact or are determined by the trial court.
Nickerson was a paralyzed veteran who spent 109 days in a Veteran’s Administration hospital after breaking his leg in a fall. Following his discharge, Nickerson sought benefits from Stonebridge under an indemnity benefit policy that promised to pay him $350 per day for each day he was confined in a hospital for the necessary care and treatment of a covered injury. However, invoking the policy’s definition of “Necessary Treatment,” Stonebridge determined, without consulting the treating physicians, that the hospitalization was “medically necessary” for only 18 days and paid him on that basis. Following trial, Nickerson obtained an award of $31,500 in unpaid policy benefits and $35,000 in compensatory damages for emotional distress. Plus, the jury awarded him $19 million in punitive damages for fraud. After the jury rendered its verdict, the parties stipulated to $12,500 in attorney’s fees pursuant to Brandt.
The case was appealed and then went to the California Supreme Court after the trial court had conditionally granted a new trial motion by Stonebridge depending on whether Nickerson accepted a reduction in punitive damages to $350,000, or ten times the general damages award, which Nickerson declined. But the Supreme Court dealt only with the question whether Brandt fees should be included in the calculous in Nickerson I. Stonebridge argued on remand that applying a 10-1 ratio was unconstitutionally excessive in the first instance, something the Supreme Court had not addressed. Stonebridge argued that the use of a 10-1 ratio should not be applied on remand when Brandt fees were due to be factored in, but that the ratio should be no more than 1-1, or $35,000, because: (1) there was a low degree of reprehensibility and Nickerson only suffered non-economic damages and (2) the evidence did not support the jury’s finding that Stonebridge acted with fraud.
The appeals court disagreed, stating: “In determining the constitutional maximum for a particular punitive damage award under the due process clause, we are directed to follow three guideposts: ‘(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.’” (Citing State Farm, supra; and BMW of North America, Inc. v. Gore (1996) 517 U.S. 559.)
The Nickerson II court then cited State Farm for five “aggravating” factors that determine reprehensibility: “[W]hether: (1) the harm caused was physical as opposed to economic; (2) the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; (3) the target of the conduct had financial vulnerability; (4) the conduct involved repeated actions or was an isolated incident; and (5) the harm was the result of intentional malice, trickery, or deceit, or mere accident.... The existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect.”
As to the first, the court said that the harm was basically economic, because Nickerson had not proven any physical manifestations of his emotional distress as a consequence of the insurer’s bad faith and fraud. However, as to the second factor, the court found indifference and reckless disregard. Stonebridge had relied on a peer review of Nickerson’s records but refused to supply the peer reviewer with a follow up opinion from Nickerson’s treating physician. Further, the insurer arbitrarily declared that Nickerson’s stay in the VA hospital was not economically appropriate, despite the fact that his treatment was free of charge. Also, Stonebridge applied an “acute” care standard not supported by the policy language, and contended that Nickerson should be returned home despite his doctors’ own opinions that he could not be safely discharged. Further, there was evidence that Stonebridge had limited peer reviews in other cases by preventing communication between peer reviewers and treating physicians.
As to the third factor, the Nickerson II court also found Nickerson “clearly financially vulnerable: he is a permanently disabled 58-year-old paraplegic and a former marine whose only source of income is a paltry military pension.”
The court also found conduct involving repeated misconduct. In particular, the trial court had ruled that the Stonebridge policy’s “Necessary Treatment” definition was unenforceable, but the evidence showed that Stonebridge had a business practice of employing that same “Necessary Treatment” definition to deny claims for other insureds. “Thus, Stonebridge repeatedly relied on an unenforceable provision to deny coverage to its insureds.”
Interestingly, the court rejected an argument that Stonebridge could not know that the provision was unenforceable until the court found it so, saying that the fact that the provision was not a “conspicuous, plain and clear policy limitation” rendered it unenforceable ab initio, because licensees are required to know the law and “[m]erely because those prior similar incidents did not result in an earlier finding of bad faith does not entitle Stonebridge to keep this clause in the policy with impunity until a court finds it is unenforceable.”
As to the fifth factor – intentional conduct versus mere accident – the Nickerson II court found a basis in the jury’s finding of fraud. Specifically, the appeals court said that burying a coverage limitation in fine print, thus preventing it from being “conspicuous plain and clear” was concealment, a species of fraud: “Stonebridge limited the scope of its promise of coverage by burying it in the definition of ‘Necessary Treatment,’ which constitutes a concealment designed to increase Stonebridge’s profits by depriving policy holders of their policy benefits.” The court also found that by keeping a treating physician’s supplemental opinion from its peer reviewer, the insurer had likewise committed concealment. Further, concealment was also found in the insurer’s use of a peer review transmittal form with a box to check if Stonebridge required a phone consultation between the peer reviewer and the treating physician. The claim representative testified that nobody ever checked the box, which the court found supported fraud:
“Stonebridge disagrees that its failure to check the box on the transmittal form allowing the peer reviewer to speak with the treating physician constituted fraud. Stonebridge argues the box refers only to the ‘type of review’ requested and otherwise it had no obligation to ensure that the peer reviewer speak with the primary care physician. Stonebridge adds that in any event the peer reviewer received all the medical records of Nickerson’s hospital treatment. However, the box authorizing this communication exists on the transmittal form and so the failure to check it precludes contact and erects a barrier to the free flow of pertinent communication.” Therefore, the Nickerson II court found four of the five “reprehensibility” factors were met.
Having thus dealt with the reprehensibility “guidepost” of the State Farm and Gore cases, the Nickerson II court went on to address the second and third guideposts of disparity between the harm suffered and the award, and the difference between the amount awarded and similar cases. Regarding the latter – comparable civil penalties – the court declined to consider the factor, since the only evidence before the trial court related to a factually dissimilar case.
As to the former, the ratio of punitive damages to actual or potential harm, the court cited a variety of cases for the principles that “punitive damages must bear a ‘reasonable relationship’ to compensatory damages” and “[t]he Supreme Court has ‘consistently rejected the notion that the constitutional line is marked by a simple mathematical formula’.” The court stated: “In California, our Supreme Court discerned the following presumption from the high court’s endorsement of single-digit ratios: ‘ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny under the due process clause.’ ... Although ‘a ratio significantly greater than single digits ‘alerts the court to the need for special justification’ ‘the presumption of unconstitutionality applies only to awards exceeding the single-digit level ‘to a significant degree.’ ... Yet, multipliers of less than nine or 10 ‘are not . . . presumptively valid under State Farm ... [e]specially when the compensatory damages are substantial or already contain a punitive element....”
Thus, “The message to be gleaned is that the due process analysis is flexible and depends on the circumstances in determining proportionality.” And because the case involved a high degree of reprehensibility, the court found the Nickerson award based on a 10-1 ratio constitutionally justified despite relatively low actual damages.
Finally, the Nickerson II court did take note of arguments that because of the modest general damages and Brandt fees, the 10-1 ratio resulted in a relatively small punitive damages award of $475,000 in relation to the insurer’s reported $368 million net worth, and thus might be considered “the cost of doing business.” But the court stated: “[W]e also agree with the trial court that we are constrained by case law and the Constitution. The nature and size of Nickerson’s compensatory damage award does not justify a punitive damage award beyond the constitutional maximum. While Stonebridge’s financial condition is an essential consideration to be factored into our analysis, it alone cannot justify exceeding what due process will allow. We have considered these facts in our analysis. We conclude that 10:1 is the maximum constitutionally defensible ratio.”
