VOLUME XV, NUMBER 7
July, 2003

U.S. SUPREME COURT: $145 MILLION PUNITIVE DAMAGES AWARD AGAINST STATE FARM VIOLATES CONSTITUTIONAL DUE PROCESS

The U.S. Supreme Court has reversed a $145 million dollar punitive damages award against State Farm arising from a third-party, excess judgment bad faith claim in Utah. State Farm Mutual Automobile Insurance Co. v. Campbell, 16 FLW Fed. S216 (April 7, 2003). The bad faith claim arose from State Farm’s handling of suits by two parties against its insured, Curtis Campbell, for wrongful death and personal injuries. The motor vehicle accident occurred when Campbell attempted to pass several vehicles on a two-lane highway. One of the plaintiff’s vehicles was approaching from the opposite direction and swerved to avoid a head-on collision with Campbell, lost control and struck a third vehicle. The accident resulted in the death of the driver of the second vehicle and serious injuries to the driver of the third vehicle. Campbell insisted he was not at fault, but early on investigators and witnesses agreed that, in fact, Campbell’s unsafe pass caused the crash.

State Farm rejected the claimants’ offer to settle the claims against Campbell for State Farm’s $50,000.00 policy limits. Against the advice of its own investigators, State Farm took the matter to trial, assuring the insured that there was no need to procure personal counsel and that “State Farm would represent [his] interests.” However, a jury returned a verdict in the amount of $185,849.00 – and State Farm refused to pay the $135,849.00 excess over the policy limits. Defense counsel advised Campbell that “you may want to put for sale signs on your property to get things moving.” Neither did State Farm agree to post a bond to allow the insured to appeal the judgment. The insured retained its own attorney to appeal the verdict. Not surprisingly, Campbell agreed to pursue a bad faith claim in exchange for an agreement by the plaintiffs not to execute on the judgment against him. Eventually, State Farm did in fact pay the excess judgment.

The bad faith claim was tried in Utah, in two phases, with Campbell also asserting claims for fraud and intentional infliction of emotional distress. In the first phase, the jury found that State Farm’s decision to settle was unreasonable, given the substantial likelihood of an excess verdict. The fraud and emotional distress claims and damages were addressed in the second phase. In the second phase, over State Farm’s objections, the trial court allowed testimony about State Farm’s “national scheme to meet corporate fiscal goals by capping payouts on claims company wide.” Evidence was allowed regarding State Farm’s “fraudulent” practices nationwide. Many of the practices were unrelated to third-party insurance claims. The jury awarded $2.6 million in compensatory damages and $145 million in punitive damages, which were reduced by the trial court to $1 million and $25 million. Both parties appealed. The Utah Supreme Court reinstated the punitive damages award. State Farm appealed to the federal courts on a theory that the $145 million award was excessive and in violation of the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution.

The U.S. Supreme Court agreed. It considered the three guideposts announced in a 1996 decision, BMW of North America, Inc. v. Gore: (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. Acknowledging that State Farm’s handling of the claim “merits no praise,” the court nonetheless noted that a more modest punishment for its conduct could have satisfied the state’s legitimate objective of deterrence and retribution. In addition, the harm caused was financial, not physical, and there was little evidence of conduct by State Farm similar to the conduct that harmed the insured.

Of particular interest is the court’s analysis of the second guidepost, i.e., the ratio between the compensatory and the punitive damages awards. In this case noting that “we have no doubt that there is a presumption against an award that has a 145-to-1 ratio.” While declining to establish a “bright-line ratio” which a punitive damages award cannot exceed, the court referenced earlier opinions in which it ruled that a 4-to-1 ratio “might be close to the line of constitutional impropriety.” Thus, “few awards exceeding a single digit ratio . . . will satisfy due process.” Moreover, where compensatory damages are substantial, even a 1-to-1 ratio, can reach the outer limit of the due process guarantee. Finally, as to the third guidepost, the court noted that the only Utah civil penalty which could remotely have applied to State Farm’s conduct would have been a $10,000.00 fine for an act of fraud.

The court’s decision is ultimately grounded upon the fact that State Farm did not physically injure the plaintiff and there was a fairly large compensatory damages award. However, it did not foreclose the possibility of a higher compensatory-to-punitive ratio in case where the conduct was particularly egregious, but resulted in a small compensatory award. It should also be noted that the Supreme Court’s decision validates the use and admissibility of evidence of the insurer’s out-of-state conduct unrelated to the handling of the specific claim at issue. Thus, so long as the evidence is similar and jurors are instructed on its limits, evidence of conduct in other states is allowable.

Anna D. Torres

LIMITATIONS ON THE ADMISSIBILITY OF EXPERT TESTIMONY

In SIHLE Insurance Group, Inc. v. Right Way Hauling, Inc., 28 FLW D1259 (Fla. 5th DCA 2003), the Fifth District Court of Appeal held that while trial courts continue to possess broad discretion in qualifying a person as an expert under Fla.R.Civ.P. 1.390 and §90.702, Fla. Stat. the admission of expert testimony on loss profits must be supported by competent evidence sufficient to satisfy the mind of a prudent and impartial person.

In this case, Right Way purchased a power screen to enhance its manufacturing capacity of mulch. Upon purchasing the power screen, Right Way requested its insurance agent, SIHLE, to add the power screen to its policy of insurance. On July 29, 1999, Right Way sustained a fire loss including the power screen. Century Surety Company, Right Way’s insurer, denied Right Way’s claim because SIHLE failed to add the power screen to the policy of insurance. Thereafter, Right Way filed suit against SIHLE for negligence and breach of contract for SIHLE’s failure to procure coverage on the power screen. The jury awarded Right Way $90,000.00 for the loss of the power screen, and $256,000.00 in damages for lost profits stemming from Right Way’s inability to replace the power screen without insurance coverage.

SIHLE appealed the $256,000.00 judgment for loss profits and argued that the trial court improperly admitted expert testimony on Right Way’s profits because the evidence was speculative and predicated on overly optimistic economic assumptions; and Right Way’s expert witness failed to deduct amounts for salaries in calculating profit.

The Fifth District noted that trial courts possess broad discretion in admitting expert testimony under Fla.R.Civ.P. 1.390, which defines an expert witness as “a person regularly engaged in the practice of a profession who holds a professional degree... and has special training and experience, or one who possessed special knowledge or skill about the subject upon which the witness is called to testify... can render testimony to assist the trier of fact.”

The Fifth District further observed that §90.702 Fla. Stat. authorizes a qualified expert to render testimony if his or her scientific, technical or specialized knowledge will assist the trier of fact. Although Right Way’s expert witness (a public adjuster) did not possess a formal degree, his previous qualification as an expert in Federal and State Court, his qualification to act as an accountant in Europe, and his published articles and lectures on business interruption and lost profits satisfied the standards set forth in Fla.R.Civ.P. 1.390, and §90.702, Fla. Stat.

Nevertheless, the court held that Right Way’s expert’s testimony on lost profits lacked an economically sound foundation to support the admission of his testimony. First, the expert’s projection of Right Way’s revenue hinged upon the assumption that Florida Mulch, a Right Way customer, would pay $12.00 per yard for 5 to 6 loads of mulch per day. This economic assumption ignored the fact that Right Way’s agreement with Florida Mulch provided for 5 to 6 loads per week, and utilized a price range of $5.00 to $12.00 per load. Accordingly, the expert’s valuation of Right Way’s agreement with Florida Mulch relied on speculation and faulty data. Second, while Right Way’s expert testified that Right Way’s profit potential exceed $150,000.00 per month, he ignored the fact that Right Way’s pre-loss monthly profits averaged $30,000.00, and he assumed that Right Way would increase its manufacturing capacity by 250%. Moreover, under Traveler Ins. Co. v. Wells, 633 So.2d 457 (Fla. 5th DCA 1993), an award for lost profits must be supported by a history of profitability; a feature absent in Right Way’s tax returns. Third, Right Way’s expert’s earnings projections did not incorporate evidence of a decline in the market price of mulch, and he failed to deduct salaries from the net profit calculations.

Accordingly, the Fifth District held while that Right Way’s expert witness met the technical qualifications to render expert testimony under Florida law, the data and economic assumptions supporting his conclusions rendered his opinion incompetent for purposes of determining Right Way’s loss profits. Therefore, the court reversed the $256,000.00 judgment and remanded the case for a new trial on damages.

This case highlights several pitfalls associated with expert testimony. Experts come in all shapes and sizes, and their expertise often hinges upon their education, training, and experience. A trial court’s broad discretion coupled with Florida’s relatively broad requirements to qualify a person as an expert shows that even a public adjuster can qualify as an expert on a complicated issue such as lost profits.

This case also illustrates the distinction between qualifying a person as an expert, and admitting their testimony for the jury’s consideration. Just because a person is qualified as an expert does not mean that their proffered testimony is admissible, or if it is admitted, that the case will survive appeal. A party’s attorney must resist the temptation to swear blind allegiance to a person solely because they or others consider that person an “expert.” If an expert has not performed a thorough analysis of the subject mater of the litigation, the results of their testimony may yield disappointing results. Therefore, it is incumbent upon an attorney to test the relevance, foundation, and accuracy of an expert’s proferred testimony prior to trial.

Mark A. Kirsch

WHETHER THE INSURED MATERIALLY BREACHED THE POLICY BY FAILING TO COOPERATE IS A JURY ISSUE WHERE THE INSURED COOPERATES TO SOME DEGREE

The Fourth District Court of Appeal recently held that the sufficiency of an insured’s cooperation in its insurers’ investigation of a loss as required by an insurance policy’s cooperation clause is an issue reserved for the consideration of a jury and not for the sole consideration of a trial judge. Schnagel v. State Farm Mutual Automobile Insurance Company, 28 FLW D1139 (May 7, 2003). Schnagel reported her vehicle stolen to State Farm. State Farm suspected that Schnagel was somehow involved in the claimed theft incident and pursuant to the policy’s cooperation clause, demanded that Schnagel provide it with a variety of documents.

Although Schnagel did provide State Farm with some of the documents the insurer had requested, not all requested documents were produced for State Farm’s review. The trial judge determined Schnagel had breached the policy’s cooperation clause for her failure to produce all of the requested documentation. However, on appeal the Fourth District concluded that the trial judge’s entry of final summary judgment in favor of State Farm was an error. The appellate court held that when circumstances reveal that an insured has cooperated to some degree in an insurers’ investigation of a claim, producing some if not all of the documents requested by its insurer, the issue of whether or not said insured is in material breach of a policy’s cooperation clause, is an issue of fact to be determined by a jury and not by a trial judge.

Tana R. Sachs Copple