Why pay $50,000 when you could pay $145 million?

Utah Business, Oct, 2002 by Gretta Spendlove

Avoiding Punitive Damage Claims

In October 2001, the Utah Supreme Court upheld a judgment for $145 million in punitive damages against State Farm Mutual Automobile Insurance Company. The judgment was granted in favor of State Farm's insureds, the Campbells. State Farm might have avoided that liability by paying $50,000.

In 1981, Curtis Campbell "unsafely" passed a car while driving up US 89 to Logan. One man, Ospital, was killed, and another, Slusher, was disabled, In the resulting lawsuit, Slusher offered to settle for Campbell's policy limit, $25,000. State Farm refused the offer and, according to the Utah Supreme Court decision in Campbell v. State Farm Mutual Automobile Insurance Company, assured Campbell he had no liability for the accident. State Farm took the case to trial, and judgments were entered against Campbell for $185,000. State Farm's attorney then suggested the Campbells put "for sale" signs on their property. Instead, they sued State Farm for bad faith failure to settle within insurance policy limits and damages for fraud and intentional infliction of emotional distress. They won, and were awarded both $1 million in compensatory damages and $145 million in punitive damages.

The Campbells also uncovered a nation-wide scheme by State Farm, to "meet corporate fiscal goals by capping payouts on claims company wide." They presented evidence that State Farm had changed the contents of files and lied to customers in order to meet financial goals.

What went so wrong that State Farm was hit with a $145 million punitive damage claim? How can other businesses avoid paying punitive damages?

What are punitive damages? Usually, damages are given to repay people for a loss they actually sustain. For instance, in a car accident, the victim might be paid for damage to the car, medical expenses and emotional distress. If the conduct of the perpetrator is particularly egregious, the court or jury may award additional "punitive damages" to punish the perpetrator and deter future bad acts. Punitive damages may be awarded in all sorts of cases, from those involving defective products (e.g. tobacco litigation and car safety cases) to insurance claims and securities fraud.

What are the criteria for awarding punitive damages? In the 1991 case of Crookston v. Fire Insurance Exchange, the Utah Supreme Court listed seven factors to consider in awarding punitive damages. These include the wealth of the defendant, the nature of misconduct, the facts surrounding the misconduct, the effect of the defendant's misconduct on the lives of others, the likelihood that the misconduct will recur, the relationship of the parties, and the amount of actual damages awarded.

For instance, in the State Farm case, the court decided that a larger than normal punitive damage award was necessary to catch the company's attention, since "State Farm's corporate headquarters had never learned or, much less acted upon, a punitive damage award of $100 million in a previous case."

How can punitive damages be avoided? "It boils down to a sincere, honest approach to business," says Rich Humpherys, the attorney who represented the Campbells against State Farm, and who also represented the plaintiffs in the Crookston case. "Utah jurors get absolutely incensed by evidence of fraud or intentional deceit."

"The actions after the fact can be as damaging as the fraud itself," Humpherys notes. "That's where the malicious intent is seen so clearly. Jurors ask, 'What did they do after the fraud?'" If a company sincerely tries to acknowledge and resolve problems, even if those problems are serious, the company may avoid a lawsuit or punitive damages if a lawsuit is filed. "But if the company is insincere or destroys documents and covers up the fraud, jurors will not be sympathetic."

Humpherys acknowledges that sometimes a company that is basically honest may have "an employee out of control, or who misunderstood something, or who did an unauthorized act." As soon as management finds out, the company needs to make clear that "this was a mistake. This is not the way we conduct our business" and begin to resolve the problem.

"When someone engages in fraudulent or clearly wrongful behavior," Humpherys notes, "that often has a chilling effect on the economy. Competitors have to either engage in similar wrongful conduct to stay competitive or lose business," Punitive damages can be an effective tool in preventing this unfair competition.

The bottom line. Punitive damages can be huge. Maintaining honest, forthright business practices and doing quick damage control when problems occur can prevent a $50,000 problem from turning into a $145 million problem.

Gretta Spendlove is a shareholder with Durham, Jones & Pinegar.