Campbell vs. State Farm: U.S. Supreme Court May Resolve Issue

Outrageous! A travesty of Justice! Should be reversed! Both sides have probably said that at one time or another as the case of Campbell vs. State Farm worked it’s way through Utah’s court system, culminating in the State’s Supreme Court upholding an award of $145 million in punitive damages last October.*

In 1981 83-year old Curtis B. Campbell, who was insured by State Farm, collided with two other vehicles, killing one driver, Todd Ospital, and permanently disabling the other, Robert Slusher. State Farm assumed his defense, and despite extensive evidence showing he was at fault, steadfastly refused to settle the case, or offer the $50,000 limits of his policy.

A trial jury found Campbell guilty of negligence and awarded Slusher $135,000 and Ospital’s estate $50,849. After several appeals and remands State Farm eventually paid the full amount of the judgements in 1989. “Shortly thereafter, the Campbells [Curtis and his wife Inez] filed this action against State Farm alleging, among other things, bad faith, fraud, and intentional infliction of emotional distress,” said the court.

After several appeals the case finally went to trial and the jury awarded the Campbells $2.6 million in compensatory damages and $145 million in punitive damages. State Farm made several post-verdict motions, which reduced the punitive award to $25 million, from which both parties appealed.

In its lengthy opinion the Utah Supreme Court praised the trial judge’s thoroughness, and exhaustively examined the seven-point test setting forth the essential factors Utah trial courts are to consider in awarding punitive damages. It determined that the state and federal guidelines had been adhered to and reinstated the original verdict.

Among the many issues the case presented, the two most important ones now are: 1) whether State Farm’s conduct in dealing with the Campbell’s was “reprehensible” enough to support an award of $145 million, and 2) whether allowing the jury to consider evidence of its national claims policies in states other than Utah was in error.

State Farm appealed the decision to the U.S. Supreme Court, and was supported by The Alliance of American Insurers, the American Insurance Association (AIA), the National Association of Independent Insurers (NAII) and the National Association of Mutual Insurance Companies (NAMIC)—the Insurance Associations—who filed an Amicus Curiae brief in support of overturning the award.

The key finding cited by the court addressed State Farm’s argument during the second, compensatory, phase of the trial “that its decision to take the case to trial was an ‘honest mistake’ that did not warrant punitive damages.” The first phase of the trial had already found that the insurer had acted in “bad faith,” and the Utah Supreme Court rejected the company’s claim.

It accepted the evidence produced by the Campbells that “State Farm’s decision to take the case to trial was a result of a national scheme to meet corporate fiscal goals by capping payouts on claims company wide. This scheme was referred to as State Farm’s ‘Performance, Planning and Review,’ or PP&R, policy. To prove the existence of this scheme, the trial court allowed the Campbells to introduce extensive expert testimony regarding fraudulent practices by State Farm in its nation-wide operations.”

The court concluded that “State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme [citing previous findings]. For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims [References]. Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals [References].

It cited as one example a finding by the trial court that a “State Farm official in the underlying lawsuit in Logan instructed the claim adjuster to change the report in State Farm’s file by writing that Ospital was ‘speeding to visit his pregnant girlfriend [References].” There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend [References]. The only purpose for the change was to distort the assessment of the value of Ospital’s claims against State Farm’s insured.”

The decision also endorsed the trial court’s finding that “State Farm’s fraudulent practices were consistently directed to persons—poor racial or ethnic minorities, women, and elderly individuals—who State Farm believed would be less likely to object or take legal action [References].”

That’s the kind of behavior that gives the insurance industry a bad name, and also leads to extremely large damage awards. Even though State Farm’s current Utah Attorney, Robert Belnap, asserted that changes in company policy during the last 20 years have eliminated such abuses, the Campbell’s award is based on its conduct then, not now.

The Utah Supreme Court also stated that “the jury’s punitive damage award of $145 million is only 0.26 of one percent of State Farm’s wealth as computed by the trial court,” and that the insurer could well afford to pay it.

Nevertheless the Appellants have a valid point in claiming that the Utah courts committed reversible error in allowing evidence to be brought in concerning State Farm’s claims procedures outside Utah. It’s clear from even a cursory reading of the decision that both courts and the jury considered the entire weight of evidence against State Farm, and not just those procedures employed in Campbell’s case in Utah. That’s the primary concern expressed by the insurance associations.

An article published last June by the Insurance Information Institute (I.I.I.) described the most recent major Supreme Court ruling on punitive damages, Gore vs. BMW of North America, decided in May 1996, as taking a “step toward defining limits on punitive damage awards.” The Court struck down an Alabama decision that had upheld “a $2 million punitive damages award (reduced from $4 million by the state’s Supreme Court), on the grounds that it was so grossly excessive as to violate the 14th Amendment Due Process Clause.”

There are no hard and fast rules, but as the I.I.I. pointed out, there are guidelines. “Justice John Paul Stevens, writing for the majority, described the three-part fairness test: the degree of reprehensibility of the defendants’ conduct; the ratio of punitive to compensatory damages or actual harm to the plaintiff; and the difference between the award and comparable penalties under the law. Applying these precepts to the BMW case, Justice Stevens said that BMW had not acted in bad faith and had caused only minor economic loss (as opposed to personal injury); that the ratio of punitive damages to actual harm was 500 to 1; and that under Alabama’s Deceptive Trade Practices Act, the defendant would have paid a $2,000 penalty, a tiny fraction of the award, and lesser amounts in some other states.”

The Utah Court considered the BMW standard in the Campbell case, and found it had been met. Campbell’s award was roughly 56 times the $2.6 million in compensatory damages. The insurance associations contend this was “grossly disproportionate to the plaintiff’s actual damages because the punitive award was based on State Farm’s claims handling and other practices in numerous states other than Utah and which bore no similarity whatsoever to the controversy before the jury.

“The industry disputes the Utah Supreme Court’s decision to allow a single jury in one state to award punitive damages based on an assessment of the lawfulness of an insurer’s practices outside that state or practices that are dissimilar to the practices being reviewed by the jury,” said the joint announcement. They contend that “the role of the jury would be radically transformed from that of a fact finder in a particular dispute into a national insurance regulator.”

The brief also cites the McCarran-Ferguson Act, which it argues commits the regulation of insurance “to the states with each state regulating conduct within its own borders.” It emphasizes the stricture that “a state may not extend its insurance regulatory power outside its boundaries,” and concludes that “The Utah jury superseded these state-by-state judgments by conducting a national review of a wide variety of State Farm’s underwriting, coverage and
claims handling practices without any knowledge of the law in those states.

“The brief argues that awarding punitive damages for conduct that is perfectly lawful in other states or is not subject to a private right of action or to punitive damages in other states infringes on the freedom of those states to determine how to penalize and deter conduct within their own borders,” the bulletin continued.

It disputes the right of one state’s courts to take into account activities in other states, and concludes that, “When the punitive damage case stops being about the harm done to a plaintiff and becomes an indictment of an insurer’s nationwide practices involving policyholders in other states, it essentially becomes a nationwide class action without the class and without protections afforded to class members and defendants.”

The argument is a strong one, and an old one. An analogy can be found in the 1819 decision in McCulloch vs. Maryland, which involved state power to tax federal institutions, in this case the U.S. National Bank. “If the states may tax the bank, to what extent shall they tax it, and where will they stop,” wrote Chief Justice John Marshall. “An unlimited power to tax involves, necessarily a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.”

Substituting “punitive damage awards” for “taxation” explains the insurance associations’ principal concern. What if the courts of each state were to sit in judgment on the general conduct of a national insurance company like State Farm? Campbell is a hard case, and as the old legal saying goes “hard cases make bad law,” but it doesn’t diminish the fact that a finding of “bad faith” in a $2000 fender bender in Fresno could potentially generate millions of dollars in punitive damages because of something the company may have done in Texas.

The insurance associations’ argument is weakened, however, by the assertion that the Utah jury was allowed to consider evidence of State Farm’s conduct in states other than Utah “that is perfectly lawful,” or “without any knowledge of the law in those states.”

The company was unable to convince the court or the jury that it had made an “honest mistake” in not settling the Campbell case. It was unsuccessful in showing that the conduct of its insurance adjusters was limited to a few bad apples in Utah.

On the contrary the jury heard and determined that the acts were part of the company’s national policy, which made them a good deal more serious, or “reprehensible” in legal terms. Campbell may have suffered directly only from what State Farm did in Utah, but he proved that those acts were an integral part of its national claims policy. This is precisely the type of conduct that awards of punitive damages are supposed to discourage. It is now up to the Supreme Court to decide whether an insurer can prevent a court and a jury from considering that aspect of a case in assessing them.

*The full, text of the Utah Supreme Court Opinion is available at: http://courtlink.utcourts.gov/opinions/supopin/campbell.htm.

Topics Carriers USA Fraud Legislation Claims