Why punitive damages should remain 2x or 3x the amount awarded by a jury

Issue June 2012 By Arthur F. Licata

Punitive damages are a deterrent, and a punishment, for an insurance company's bad faith and its unfair and deceptive claims settlement practices. These public policy decisions by the Massachusetts Legislature were discussed in the recent Massachusetts Supreme Judicial Court decision Rhodes, et al. v. AIG Domestic Claims, Inc., et al., 461 Mass. 486 (2012). The court found violations of the Consumer Protection statute. Pursuant to the statute, the court ordered the jury award doubled.

Since the case involved a truck rear-ending a car, there was no issue concerning liability. The passenger was severely injured. The jury awarded damages for her lifelong care in the amount of $9.5 million, and, with interest, it amounted to $11.3 million. In deciding that the amount should be doubled, the SJC stated that "[we] recognize that $22,000,000 in c.93A damages is an enormous sum, but the language and history of the 1989 amendment to c.93A leave no option but to calculate the double damages award against AIGDC based upon the amount of the underlying tort judgment."

The court went on to say that "[t]he Legislature may wish to include more than a single, but less than double, damages; or developing a special measure of punitive damages to be applied in unfair claim settlement practice cases brought under c.176D, section 3(9), and c.93A that is different from the measure used in other types of 93A actions."

It is as if the SJC was apologizing or embarrassed by its decision. This impression is unfortunate. It undermines the very public policy principles that gave rise to consumer protection statutes. The Legislature understood the unequal bargaining power between a multinational insurance company and an individual claimant. The statute encompassed the rightly held view that monetary sanctions are the only way to change the unlawful behavior of an insurance company.

As to the appropriate amount of punitive damages to be awarded, the $22 million in the Rhodes v. AIG case is not typical. It should not be used as the criteria or as an example of a fair punitive sanction. Rhodes is a catastrophic injury case with lifelong medical care and lost earning capacity. The more typical cases are those that are the bread and butter of personal injury practice. The parties are usually negotiating cases that are between $100,000 and $500,000. These types of cases are the ones that cumulatively save insurance companies millions of dollars each year when they refuse to settle them, even though liability has become reasonably clear.

If one obtained a jury verdict for $100,000, the doubling of the jury award would amount to a punitive damage award of $200,000. If one obtained a jury award of $250,000, and it was doubled in punitive damages, the award for unfair and deceptive claims settlement practices would be $500,000. These are hardly "enormous" or "shocking figures." They reflect a more realistic likelihood for future punitive damage awards consistent with the Rhodes case.

These punitive awards have just enough bite that insurers will realize it has become more expensive to ignore the law in Massachusetts than to obey it. If one multiplies these medium-size cases over the course of a year or five years, the insurers will lose too much money. They will be exposed to too many potential punitive damage awards for them to maintain a "stonewalling" business model.

The public policy behind c.93A and 176D has just become effective. Neither the Court nor the Legislature should now eviscerate the law's ability to protect consumers. As a result of the Rhodes decision, Massachusetts courts are no longer paper tigers when asked to enforce the state's consumer protection laws.