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By Patrick A. Calhoon

On June 9, 2016, the California Supreme Court unanimously ruled in Nickerson v. Stonebridge Life Ins. Co., __ Cal.4th ___ (2016) (Nickerson) that attorney’s fees awarded to a plaintiff in an insurance bad faith lawsuit (“Brandt fees”) must be included as compensatory damages in the calculation of the compensatory to punitive damage ratio for purposes of determining whether a jury’s punitive damages award is within constitutional limits. The inclusion of Brandt fees in the compensatory to punitive damage ratio results in an increase in the amount of punitive damages that will pass muster under the constitutional limits discussed in cases like State Farm Ins. Co. v. Campbell, BMW v. Gore, Simon v. Sao Paolo U.S. Holding, Inc., etc. Moreover, some argue that Nickerson may indicate a favorable change in the California Supreme Court’s evaluation of punitive damage awards and its view on the permissible ratio between compensatory and punitive damages.

The Facts of Nickerson

A paralyzed veteran, Thomas Nickerson, fell from the wheelchair lift on his van suffering a severe leg injury. He was taken to a veteran’s hospital where he received medical care at no cost. After spending several weeks confined to a hospital bed, Nickerson was permitted to move to his wheelchair, but could tolerate sitting in the wheelchair for only limited periods of time. Later, Nickerson’s treating physician determined that he was stable and would have been ready to return home except that he was unable to maneuver through his home without a particular part needed for his wheelchair. As a result, Nickerson’s hospital stay was extended. Nickerson was ultimately discharged from the hospital, after obtaining the needed part. He had been hospitalized for 109 days total. Nickerson at *1.

Following his discharge, Nickerson sought benefits from Stonebridge Life Insurance Co. under an indemnity benefit policy that promised to pay $350 for each day he was confined in a hospital for the necessary care and treatment of a covered injury. Invoking the policy’s definition of “necessary treatment,” Stonebridge determined, without consulting the views of Nickerson’s treating physicians, his hospitalization was medically necessary for only 18 days of his 109 day stay. Stonebridge sent Nickerson a check for $6,450, which represented payment of $150 for one visit to the emergency room and $6,300 for 18 days of hospitalization at $350 per day. Nickerson at *2.

Nickerson filed suit against Stonebridge alleging breach of contract and breach of the implied covenant of good faith and fair dealing based on the denial of payment for the full 109 day hospital stay. At the close of Nickerson’s case, the trial court granted Nickerson’s motion for a directed verdict on the breach of contract cause of action and awarded him $31,500 in unpaid policy benefits. The jury returned a special verdict finding Stonebridge’s failure to pay policy benefits was unreasonable and awarded Nickerson $35,000 in emotional distress damages. The jury also found that Stonebridge’s denial was fraudulent under section 3294 of the California Civil Code, and awarded Nickerson $19 million in punitive damages. After the jury rendered its verdict, the parties stipulated that Nickerson was entitled $12,500 in Brandt fees. The court awarded that amount.

Stonebridge moved for a new trial seeking a reduction in the punitive damages award, which it argued was constitutionally excessive. The trial court agreed, and granted Stonebridge’s motion unless Nickerson consented to a reduction of the punitive damages award to $350,000. The trial court cited State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, 426 (State Farm), for the proposition that a punitive-compensatory ratio exceeding single digits will ordinarily exceed constitutional bounds. Id.

The trial court determined it was bound to reduce the punitive damage award to a ratio of 10-to-1. In calculating the permissible punitive damages, the court only considered the $35,000 the jury awarded in compensatory damages for emotional distress due to Stonebridge’s tortious breach of the implied covenant of good faith and fair dealing. The trial court did not include the $12,500 Nickerson was awarded in Brandt fees. Id.

Nickerson rejected the reduction in punitive damages and appealed the order granting a new trial. A divided Court of Appeal affirmed. The Court of Appeal held the trial court properly reduced the jury’s award to a 10-to-1 ratio and correctly calculated the amount of compensatory damages for the purpose of its punitive-to-compensatory damages ratio analysis. Id. at *3.

Nickerson’s argument that the trial court should have included the $12,500 in Brandt fees was rejected by the Court of Appeal. The court acknowledged the Court of Appeal’s holding in Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1224, that “the amount of the jury’s award of Brandt fees … may be properly considered … in determining if the ratio of punitive damages to the tort damages award is excessive.” But the court distinguished Major on the ground that the jury in that case had awarded Brandt fees as part of tort damages. When Brandt fees instead “are awarded by the trial court after the jury awards punitive damages,” the court held, the fees are not properly included in the constitutional calculus. In support of that proposition, the court cited Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538, 1565, which stated, without further elaboration or citation, that the trial court in that case had “properly excluded the amount of Brandt fees in determining the compensatory damages award, since the Brandt fees were awarded by the court after the jury had already returned its verdict on the punitive damages.”

Review was granted, limited to the question of whether an award of Brandt fees is properly included as compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict. Id. at *3.

Nickerson’s Review of the Substantive Guideposts for Evaluating Punitive Damage Awards

The United States Supreme Court decision BMW of North America Inc. v. Gore, 517 U.S. 559 (1996) set forth the substantive guideposts a reviewing court must consider in evaluating the size of a punitive damages award were set forth in . They include: 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. Nickerson primarily involves the application of the second guidepost. Id. at *4.

Nickerson explains that “because the Gore guideposts are designed to govern post-verdict judicial review of the amount of a jury’s award, not the adequacy of the jury’s deliberative process, there is no apparent reason why a court applying the second guidepost may not consider a post-verdict compensatory damages award in its constitutional calculus.” Id at *7. Therefore, Nickerson held that excluding post-verdict Brandt fees would overlook a component of an insured’s harm. The effect would be to skew the proper calculation of the punitive-to-compensatory damages ratio, and thus impair reviewing courts’ full consideration of whether, and to what extent, the punitive damages awards exceed constitutional bounds. Id. at *8.

Did Nickerson Loosen the Cap on Punitive Damages?

One of the biggest take ways from this case comes from the California Supreme Court’s discussion of the primary U. S. Supreme Court cases on punitive damages, including State Farm Ins. Co. v. Campbell, Cooper Industries v. Leatherman Tool Group, Inc., Pacific Mutual Life Ins. Co. v. Haslip, Philip Morris USA v. Williams, Honda Motor Co. v. Oberg, and BMW v. Gore. Interestingly, none of those cases approved a punitive damages ratio as high as the 10-to-1 in Nickerson. Further, the Court was silent on the ratio of 3- or 4-to-1 suggested by the dreaded decision of State Farm v. Campbell as the constitutional limitation.

Nickerson instead appeared to focus on the California Supreme Court case of Simon v. Sao Paolo U.S. Holding, Inc., 35 Cal.4th 1159 (2005) which allowed a 10-to-1 ratio. In Simon the court discussed ratios between 1-to-1 and 10-to-1, stating that a higher ratio may be allowed where the compensatory damages are small or there is extreme reprehensibility. Id at *1181. However, in Nickerson the Court did not even mention a lower range of punitive damages. Moreover, Nickerson doesn’t discuss another California Supreme Court case which reduced punitive damages to a 1-to-1 ratio because the compensatory award contained a “substantial” award of noneconomic damages. See, Roby v. McKesson Corp., (2009) 47 Cal.4th 686, 719. A curious omission considering Nickerson’s compensatory damages consisted only of noneconomic damages.

Accordingly, Nickerson begs the question- Is the California Supreme Court signaling a willingness to permit a higher ratio of compensatory to punitive damages? Only time will tell. However, Nickerson certainly got the attention of several Tort Reform minded entities, including the American Tort Reform Association, the National Association of Mutual Insurance Companies, the Property Casualty Insurers Association of America, and others who all filed amicus briefs on Stonebridge’s behalf. That is somewhat surprising given the mere $35,000 in compensatory damages awarded in this case. One can conclude that those in the Tort Reform camp are feeling spooked by this development.