Insurers Hail Supreme Court’s Curtailing of Punitive Damages

February 21, 2007

Yesterday’s U.S. Supreme Court 5-4 decision throwing out $79.5 million in punitive damages, a victory for cigarette maker Philip Morris, is also being seen as a victory by the insurance industry.

In the case, Philip Morris USA v. Mayola Williams, the U.S. Supreme Court agreed that a $79.5 million punitive damage award granted by an Oregon jury to the Williams estate unconstitutionally punished the company for alleged injuries to nonparties who were not before the court and were, in effect, “strangers to the litigation.”

The jury had awarded the Williams estate $821,000 in compensatory damages, making for a roughly 100-to-1 ratio between the punitive damage award and the compensatory award.

The court stopped short of ruling that the dollar award against Philip Morris was itself excessive, a ruling that had been sought by the cigarette maker.

Still, insurers said the decision could slow the growth in damage awards because it questions the inclusion of damages for parties not directly involved in the litigation.

The ruling “is very important in restraining abusive litigation costs that are ultimately paid by families and businesses in higher product and insurance costs and lost productivity,” according to David Snyder, vice president and assistant general counsel, American Insurance Association (AIA).

AIA filed an amicus brief in the case urging the court to prohibit the imposition of punitive damages to punish a defendant for conduct directed at nonparties.

In a 2003 punitive damages case involving State Farm, the insurer group successfully urged the court to restrict punitive damage awards. The court not only maintained these restrictions in its decision Philip Morris, but took them one step further, according to AIA.

“Any decision that restrains damages is important,” said Snyder. “Punitive damages are used to leverage higher settlements.”

In its 5-4 decision, the court noted that punitive damages may be properly imposed to further a state’s legitimate interests in punishing unlawful conduct and deter it from happening again. But unless a state insists upon proper standards to restrain a jury’s discretionary authority, a state’s punitive damage system may deprive a defendant of fair notice of the severity of the penalty that a state may impose.

“It’s important to lay down clear rules,” Snyder stated. “The Supreme Court has turned back efforts to muddy that clarity. We think this decision maintains fairness, protects competitiveness and should help to hold down costs.”

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