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September 2013

Insured’s Punitive Damages Award Against Insurer Reduced From $19 million to $350,000

The California Court of Appeal, Second Appellate District, recently affirmed a trial court’s reduction of an insured’s punitive damage award against an insurer from $19 million to $350,000 (10 times the insured’s emotional distress damages).

On Aug. 29, the Second Appellate District issued its decision in Nickerson v. Stonebridge Life Insurance Co.  Stonebridge insured Thomas Nickerson under a policy that provided Nickerson with, among other things, accidental daily hospital confinement coverage in the amount of $350 per day for each day of confinement in a hospital for “Necessary Treatment.”  Nickerson was a permanently disabled 58-year-old paraplegic whose only source of income was a military pension.  On Feb. 11, 2008, Nickerson broke his leg and was treated at a VA hospital.  Nickerson spent 109 days in the VA hospital.

Stonebridge paid Nickerson benefits for the first 19 days of his hospital stay, but denied benefits for the remaining 90 days.  Based on a peer review report, Stonebridge concluded that the last 90 days of Nickerson’s treatment could have been done in a less acute care environment or at home with a caregiver, and thus did not constitute “Necessary Treatment” as defined in the policy.

In response to the partial denial, Nickerson submitted a letter to Stonebridge from his treating physician, Dr. Hung Nguyen.  Nguyen’s letter stated Nickerson could not have been discharged after 19 days because he had no available caregiver and could not have navigated through his home in his wheelchair with his leg in an elevated position.  Stonebridge responded to Nickerson in a letter dated Oct. 10, 2008, stating that Nguyen’s letter did not change its decision because Nguyen did not indicate that hospitalization in an “acute care setting” was required as of March 1, 2008.

Nickerson sued Stonebridge for breach of contract and breach of the implied covenant of good faith and fair dealing, which went to trial.  At the close of Nickerson’s case, the trial court granted his motion for a directed verdict on the cause of action for breach of contract, finding that the “Necessary Treatment” definition was a limitation of coverage that was not conspicuous, plain, and clear in the policy, and therefore was unenforceable.  The trial court awarded him benefits for the remaining 90 days.

In the bad-faith phase of the trial, the jury awarded Nickerson $35,000 in damages for emotional distress.  The jury also found Stonebridge had engaged in fraudulent conduct.  In the punitive damages phase of the trial, Nickerson introduced evidence showing Stonebridge had a net worth in excess of $368 million, as well as evidence showing other claims Stonebridge had denied based on the “Necessary Treatment” definition in its policies.  The jury awarded $19 million in punitive damages (about 5 percent of Stonebridge’s net worth).  An additional $12,500 was awarded in Brandt fees.  The trial court conditionally granted Stonebridge’s motion for new trial unless Nickerson consented to a reduction of the punitive damages to $350,000.  Nickerson rejected the reduction and both parties appealed.

The sole question on appeal was whether the punitive damages award passed constitutional muster under the due process clause.  The two-justice majority held Stonebridge’s conduct was sufficiently reprehensible to warrant punitive damages.  The Court of Appeal found the following facts supported an award of punitive damages:  Nickerson was financially vulnerable; Stonebridge repeatedly relied on the unenforceable “Necessary Treatment” definition to deny coverage to other insureds; Stonebridge required that Nickerson’s care be “acute” to be covered, notwithstanding that the policy did not include this limitation; and Stonebridge deliberately withheld Nguyen’s letter from its peer review organization.

The Court of Appeal did, however, agree with the trial court that the jury’s $19 million award offended due process, and that the maximum constitutionally permissible award under State Farm Mutual Automobile Insurance Co. v. Campbell (2003) 538 U.S. 408 and Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159 was a 10:1 ratio of punitive to compensatory damages ($350,000).  The Court of Appeal also found that the trial court was correct in not including the policy benefits and Brandt fees in its punitive damages measurement, as those damages were based in contract, not in tort.  The Court of Appeal agreed with Nickerson that his compensatory damages were small and that Stonebridge could write-off a punitive damages award of $350,000 as a cost of doing business.  However, the Court of Appeal found those considerations could not justify exceeding the constitutional limit of a 10:1 ratio of punitive to compensatory damages.

The Court of Appeal vacated the order granting a new trial and directed the trial court to modify the judgment by reducing the punitive damage award to $350,000.  As modified, the judgment was affirmed.  In a dissenting opinion, Justice H. Walter Croskey found that no punitive damages should have been awarded, as a finding of fraud was not supported by substantial evidence.

To read the opinion, please click here.

The opinion in Nickerson v. Stonebridge Life Ins. Co. (2013) 2013 Cal. App. LEXIS 693 is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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Matthew S. Foy