Key Decisions

September 2013 – A 10 To 1 Punitive Damages Ratio is Constitutional

(filed under: Key Decisions Archive | September 24, 2013)

A 10 To 1 Punitive Damages Ratio is Constitutional

Nickerson v. Stonebridge Life Insurance Company
(Cal. Ct. of App., 2d Dist.), filed August 29, 2013, published August 29, 2013


Thomas Nickerson sued Stonebridge Life Insurance Company based on its partial denial of hospitalization benefits claim. The trial court ruled that a policy provision limiting coverage was not conspicuous, plain, and clear and was therefore unenforceable, entitling Nickerson to $31,500 in additional benefits. A jury then found that Stonebridge breached the implied covenant of good faith and fair dealing and awarded Nickerson $35,000 in compensatory damages for emotional distress. The jury found Stonebridge acted with fraud, and it assessed a $19 million punitive damages award.

The trial court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a reduction of the punitive damages to $350,000. This represented a ratio of punitive to compensatory damages of 10:1. The trial court explained it “may be unlikely that a punitive damage award reduced to a 10:1 ratio will deter Stonebridge from engaging in similar tortious conduct in the future,” but the court felt “constrained to reduce the punitive damage award to 10:1 based on recent California and federal authority.” 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.

Both Nickerson and Stonebridge appealed. However, the issue was limited to the amount of the punitive damages award.


The Court of Appeal affirmed.

In determining the constitutional maximum for a particular punitive damage award under the due process clause, courts are directed to follow three guideposts: “(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.”

In determining the reprehensibility of Stonebridge’s behavior, the court considered five aggravating factors, namely whether (1) the “harm caused was physical as opposed to economic:” (2) the conduct “evinced an indifference to or a reckless disregard of the health or safety of others:” (3) the conduct’s “target had financial vulnerability;” (4) the conduct was repeated or isolated; and (5) the harm resulted from “intentional malice, trickery, or deceit, or mere accident.”

Nickerson’s injuries were solely economic. They “arose from a transaction in the economic realm, not from some physical assault or trauma” and “there were no physical injuries.”

Stonebridge acted with indifference to, and a reckless disregard of, the health or safety of Nickerson and others. Among other things, the record revealed Stonebridge’s indifference to the health and safety of others through its practice of using a hidden limitation to deny other policyholders’ claims and by preventing full communication between peer reviewers and treating physicians.

Nickerson was financially vulnerable: He was a 58-year-old permanently disabled paraplegic and a former marine whose only source of income was a paltry military pension. The court rejected Stonebridge’s argument that Nickerson did not need the money to survive; that Nickerson’s income was not affected by its decision to deny him his policy benefits because his pension was unaffected by the hospital stay and his medical treatment was free. It said: “Such argument trivializes Nickerson’s plight. Nickerson has extremely limited financial resources and needed the proceeds from his Stonebridge policy to replace his 10-year-old, specially modified van, which vehicle had 250,000 miles on it and was unsafe. Merely because Nickerson could survive without the policy proceeds does not mean Stonebridge’s conduct did not affect his solvency or that he was financially invulnerable.”

Reprehensibility is “influenced by the frequency and profitability of the defendant’s prior or contemporaneous similar conduct.” Conduct undertaken “in order to augment profit represents an enhanced degree of punishable culpability…” In reviewing punitive damages, due process allows courts to consider the defendant’s “illegal or wrongful conduct towards others that was similar to the tortious conduct that injured the plaintiff or plaintiffs…[A] civil defendant’s recidivism remains pertinent to an assessment of culpability….[A] recidivist may be punished more severely than a first offender [because] repeated misconduct is more reprehensible than an individual instance of malfeasance.”

The court agreed that Stonebridge placed its interests above its insured’s and repeatedly profited both from the sale of such unlawful insurance policy clauses to Nickerson and others, and from its wrongful claims-handling practices. “Manifestly, the denial of coverage here was the result of a practice repeatedly utilized, and not an isolated incident.”

The court rejected Stonebridge’s suggestion that the trial court improperly permitted the jury to punish it for its handling of other insureds’ claims. California has the “constitutional freedom to use punitive damages as a tool to protect the consuming public, not merely to punish a private wrong.” To consider the defendant’s entire course of conduct is not to punish the defendant for its conduct toward others. Rather, by placing the defendant’s conduct on one occasion into the context of a business practice or policy, an individual plaintiff can demonstrate that the conduct toward him or her was more blameworthy and warrants a stronger penalty to deter continued or repeated conduct of the same nature.

The court rejected Stonebridge’s argument that the record lacked evidence showing it was aware that the policy provision asserted was unenforceable when it denied Nickerson’s and others’ claims. The court reasoned that if Stonebridge seeks to do business in California, it must follow California law and it has long been the law in California that any provision purporting to limit coverage must be “conspicuous, plain and clear.” Merely because those prior similar incidents did not result in an earlier finding of bad faith does not entitle Stonebridge to keep this clause in the policy with impunity until a court finds it is unenforceable.

Next, because the jury found Stonebridge engaged in fraudulent conduct, the element of intentionality was satisfied. The court reasoned that there was substantial evidence supporting the finding of fraud: “[T]he historical evidence shows first that Stonebridge limited the scope of its promise of coverage by burying it in the definition of ‘Necessary Treatment,’ which constitutes a concealment designed to increase Stonebridge’s profits by depriving policy holders of their policy benefits. Second, Stonebridge’s practice was never to authorize peer reviewers to communicate with treating physicians, thus intentionally concealing material information from the claims’ functional decision-maker so as to limit the amount Stonebridge would have to pay out on its policies.”

Having found several aggravating factors, the court turned to the second signpost, the ratio of punitive damages to compensatory damages, which were 10 to 1.

Punitive damages must bear a “reasonable relationship” to compensatory damages or to the plaintiff’s actual or potential harm. Courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.

The Supreme Court has “consistently rejected the notion that the constitutional line is marked by a simple mathematical formula,” and “reiterate[d its] rejection of a categorical approach.” Although repeatedly declining to establish a ratio beyond which a punitive damage award could not exceed, the high court found “instructive” decisions approving ratios of four to one, and recognized that in the past “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Additionally, ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny.

The court observed that Stonebridge’s conduct evinces a high level of reprehensibility; Nickerson received a small amount of compensatory damages for his personal injury, and the monetary value was difficult to determine because he was “stoic” during his testimony; the $35,000 tort award contained no punitive element as that award was to compensate him for his emotional distress, not to punish Stonebridge; and it took a lawsuit and a court finding before Stonebridge paid all policy benefits due. It then found that a ratio of 10 to 1 did not exceed constitutional standards.

The court rejected Nickerson’s argument that a ratio of more than 10 to 1 was warranted because the small award was unlikely to deter future misconduct and that a 10 to 1 award was something Stonebridge was likely to simply treat as a cost of doing business “as usual.” While the court recognized this was likely the case, it felt compelled to limit the award to 10 to 1.

The court also rejected Nickerson’s argument that the amount of policy benefits should have been included in the punitive damage calculation. It reasoned that these were contract benefits and could not be used for punitive damages purposes.

The court also rejected Nickerson’s argument that attorney’s fees awarded under Brandt v. Superior Court, 37 Cal.3d 813 (1985) should have been included in the punitive damage calculation. It noted that when such fees are awarded by the court after the jury verdict, they cannot be used for punitive damages purposes because they were not before the jury when it assessed punitive damages.


Drawing bright lines between constitutional and unconstitutional punitive damages awards remains very difficult. Two interesting aspects of this opinion arise from the holding that only emotional distress damages could be used as the base award for purposes of determining the punitive damages ratio. This court held that the wrongfully withheld policy benefits were contract damages that could not be used a part of base award when calculating the punitive damages ratio for purposes of assessing constitutionality. Other courts, of course, have held that an insurer’s wrongful withholding of policy benefits is a tort, not just a breach of contract. See, e.g., Essex Ins. Co. v. Five Star Dye House, Inc. 38 Cal.4th 1252 (2006). At least when punitive damages are alleged, plaintiff attorneys will continue to argue that wrongfully withheld policy benefits qualify as tort damages, not just breach of contract damages.

In addition, this court held that because the Brandt fee award was assessed by the court after the jury was discharged, the award could not be used for purposes of calculating the base award used to assess constitutionality of the punitive damages ratio. Policyholder attorneys may attack this aspect of the court’s ruling on two fronts. First, they will probably argue that this ruling would complicate trials by forcing plaintiffs to try Brandt fee issues to the jury. Second, they will probably argue that it is the court that assesses the constitutionality of punitive damages, not the jury. So whether the issue is initially presented to a jury or not, the argument will be that any Brandt fee award should also be used as part of the compensatory base reviewing courts can look at for purposes of assessing the constitutionality of punitive damages ratios.