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Punitive Damage Awards in Light of Supreme Court Decisions

An injured party who has successfully proven that the injury and damages were caused by the defendant may be entitled to an award of “punitive damages” in addition to actual damages. Punitive damages are designed to punish wrongdoing on the part of a defendant and to deter the defendant (and others) from similar conduct.

Punitive Damages

The injured party bears the burden of showing that the defendant’s conduct warrants a punitive damage award. What is needed to meet this burden varies from state to state, but usually the injured party must show that the defendant acted maliciously (with ill will or spite, or the intent to injure), or in reckless disregard of the injured party’s rights (reflecting a complete indifference to the safety and rights of others).

Punitive damage awards are not common; it is estimated that they are awarded in less than 4% of all verdicts. When awarded, however, the amounts may be substantial and may garner publicity. Critics have argued for many years that jury awards of punitive damages have become excessive, out of proportion to the real economic harm sustained by the plaintiff. A number of states have responded with laws placing limits on punitive damage awards. Within the past decade, there have been a couple of landmark U.S. Supreme Court cases that considered punitive damages and set some limits on such damages.

The Supreme Court Decision in the BMW Case

In 1990, Dr. Ira Gore, Jr. bought a black BMW sports sedan. He then discovered the car had been repainted by the manufacturer, without the dealer’s knowledge. Gore sued, claiming a repainted car was worth $4,000 less than the purchase price paid. BMW stated its policy of not informing dealers of “minor” repairs less than a certain dollar amount. The jury awarded Gore $4,000 in damages and $4 million punitive damages, based on sales of about 1,000 such “repaired” cars in the U.S. in 1983, i.e., 1,000 cars x $4,000 per car.

BMW argued that the award was excessive, pointing out that that its nondisclosure policy was consistent with the laws of about 25 states. The trial judge and court of appeal affirmed the award. The Alabama Supreme Court affirmed the decision for the plaintiff, but also ruled that the jury had improperly considered actions by BMW in other jurisdictions in calculating the award, and therefore ordered a reduction of the punitive damages to $2 million. The case was appealed to the U.S. Supreme Court.

The Supreme Court held, in 1996, that the award was “grossly excessive” and therefore violated the Due Process Clause of the U.S. Constitution. The Court enunciated three “guideposts” against which punitive damage awards must be measured:

  • The degree of reprehensibility of the defendant’s conduct. The Court found that BMW’s conduct showed no evidence of indifference or reckless disregard for the safety of others; the damages were purely economic. Nor was there any bad faith in setting the standard for disclosure of damages or in dealing with Gore’s claim.
  • The ratio between the compensatory ($4,000) and punitive damages ($2 million per the Alabama Supreme Court). The punitive award was 500 times greater than the compensatory damages.
  • The difference between the punitive award and whatever criminal or civil fines could be levied against the defendant’s conduct. The maximum fine in Alabama was $2,000; the highest in other jurisdictions ranged from $5,000 to $10,000. Nothing put BMW on notice that it could face a multi-million dollar sanction for its actions.

The Court recognized Alabama’s right to punish wrongdoers and protect its citizens, but the amount was excessive. The Court also affirmed that Alabama could not punish for actions outside its own borders.

The State Farm Case

In 1981, a Utah man named Curtis Campbell was in an automobile accident. State Farm Mutual Automobile Insurance Co. (State Farm) was his insurer. Campbell insisted he was not at fault. Claims were made against him for wrongful death and personal injury and litigation ensued. State Farm defended the action and refused offers to settle for the policy limit ($50,000). State Farm assured Campbell that he did not need separate counsel and that his personal assets were safe.

The jury found against Campbell and awarded the plaintiff $185,849; State Farm at first refused to pay the excess over $50,000 and refused to appeal the decision. Campbell appealed himself, then agreed with the plaintiffs that they would not pursue collection of the judgment if Campbell assigned (transferred) to them 90% of his claim against State Farm for “bad faith.” After Campbell’s appeal failed, State Farm paid the entire judgment.

Campbell sued State Farm for bad faith, fraud, and emotional distress. The jury awarded Campbell $2.6 million compensatory and $145 million in punitive damages. The Utah Supreme Court approved the punitive award, but allowed a reduction by the trial court of the compensatory damages to $1 million. The matter was appealed to the U.S. Supreme Court.

In 2003, the Court ruled that the $145 million award based on a $1 million award violated the Due Process Clause. The Court applied the “guideposts” from the BMW case. It stated that the punitive award was improperly based on the conduct of State Farm throughout the country, plus there was no showing that State Farm treated others similarly as it had Campbell. It added that a punitive award 145 times greater then the compensatory was too much; “few awards exceeding a single digit ratio [less than ten]” satisfy due process. Finally, the most relevant Utah fine for like conduct (“grand fraud”) has a maximum fine of only $10,000. The case was sent back to the Utah Supreme Court, which awarded $9 million in punitive damages.

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