Nickerson v. Stonebridge Life Insurance Company – 10:1 The Maximum Constitutionally Defensible Ratio of Punitive to Compensatory Damages

On August 29, 2013, the California Court of Appeal, Second Appellate District, Division Three, issued its opinion in the matter of Nickerson v. Stonebridge Life Insurance Company (August 29, 2013, Case No. B234271), which provides defense attorneys with the strongest language yet in arguing for an absolute cap on the ratio of punitive damages to compensatory damages. Following its application of the three guideposts first espoused by the United States Supreme Court in BMW of North America, Inc v. Gore (1996) 517 U.S. 559, to the facts of the case, the Court concluded that “10:1 is the maximum constitutionally defensible ratio.”

Underlying Trial Court Matter

Nickerson, a former marine is paralyzed from the waist down. As a result of a wheelchair accident, Nickerson suffered a displaced fracture of his right tibia and fibula. Due to these injuries and complications stemming therefrom, Nickerson spent 109 days at the Long Beach Veterans Affairs hospital. Following his release, Nickerson submitted a claim to Stonebridge, his insurer. Stonebridge denied a significant portion of the claim citing the “necessary treatment” limitation in Nickerson’s insurance contract. Nickerson filed suit alleging Stonebridge breached the contract by failing to pay him benefits for the full 109 days of his hospital stay. He further alleged Stonebridge breached the implied covenant of good faith and fair dealing by acting unreasonably and in bad faith in denying him the full policy benefits.

At the close of Nickerson’s case, the trial court granted his motion for a directed verdict on the breach of contract cause of action, finding as a matter of law that the “Necessary Treatment” limitation was a limitation of coverage that was not conspicuous, plain and clear in the policy and, therefore, was unenforceable. The court found that Nickerson was entitled to $31,500 in unpaid benefits for the breach of the contract. Additionally, the jury returned a special verdict finding that Stonebridge’s failure to pay policy benefits was unreasonable and without proper cause and that Nickerson suffered $35,000 in damages as a result.

In the punitive damages phase of trial, the court instructed the jury that Stonebridge failed to comply with two orders to produce documents. This instruction was the result of Stonebridge’s defiance of two court orders to produce its so-called “Blue Forms,” the internal forms Stonebridge used when denying claims, which are required to comply with the California Fair Claims Practices Act. The jury also heard evidence that Stonebridge had a net worth in excess of $368 million. The jury awarded Nickerson $19 million in punitive damages, equaling approximately 5 percent of Stonebridge’s net worth. After trial, the parties stipulated to $12,500 in attorney fees (representing Brandt fees), and the court awarded that amount.

Stonebridge filed a motion for a new trial based on several theories, including the excessiveness of the punitive damage award. After conducting a constitutional analysis under State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, the trial court reduced the punitive damage award to a ratio of 10:1 (punitive to compensatory damages). In calculating the amount of punitive damages, the court considered only the $35,000 in compensatory damages for Stonebridge’s breach of the implied covenant; it did not include the $31,500 in damages for the insurer’s breach of contract or the $12,500 in attorney fees. Accordingly, the court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a remittitur of the punitive damage award to $350,000, in which event the new trial motion would be denied.

ickerson appealed contending the trial court erred in two respects: (1) in concluding it was constrained by law to limit punitive damages to no more than 10 times the compensatory award, and (2) in excluding certain categories of compensatory damages when fixing the ratio of compensatory to punitive damages.

Appellate Court Opinion

The Court of Appeal considered three guide posts which determine the constitutional maximum for a particular punitive damage award under the due process clause: “(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. [Citation.]” (State Farm, supra, 538 U.S. at p. 418, citing BMW, supra, 517 U.S. at 575.)

Under the first guide post, the Court found, four of the five reprehensibility factors were present, resulting in an ultimate finding that Stonebridge’s conduct to be reprehensible. The Court further found the third guidepost to be inapplicable. Turning to the second guidepost, the Court stressed that the ratio between punitive and compensatory damages is “a central feature in [the] due process analysis.” (Exxon Shipping Co. v. Baker (2008) 554 U.S. 471 [emphasis added].) In conducting this analysis, the Court drew comparisons between the facts in the leading California case on the issues, Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, and the facts before it. In Simon, the California Supreme Court concluded that only one of the five reprehensibility factors was present, whereas the Nickerson Court found four of the five present. Further, the compensatory award in Simon was a mere $5,000, similar to the small amount Nickerson received for his injuries. These similarities led the Appeals Court to find that Stonebridge’s reprehensible conduct, called for a significant ratio of punitive to compensatory damages. However, in making this finding, the court also concluded that “10:1 is the maximum constitutionally defensible ratio.” This conclusive statement can only be interpreted to convey that any ratio above 10:1 runs afoul of constitutional requirements. This language is the strongest and most conclusive yet on this issue in California case law. Defense arguments in support of an absolute ceiling for potential punitive damage has become stronger. This language will aid defense attorneys seeking new trials based on unconstitutional punitive damage verdicts.