In calculating whether the ratio of punitive damages to compensatory damages is constitutionally excessive, the amount of compensatory damages should include attorney’s fees awarded pursuant to Brandt v. Superior Court (1985) 37 Cal.3d 813, whether those fees are awarded by the jury as part of its verdict or by the trial judge after the verdict. ( Nickerson v. Stonebridge Life Ins. Co. (2016) — P.3d —-, 2016 WL 1726079)
Facts
On February 11, 2008, Thomas Nickerson, who is paralyzed from the chest down, broke his leg when he fell from the wheelchair lift on his van. Because Nickerson was a veteran, he received medical care at no cost from a Department of Veteran Affairs hospital. Due to complications from the injury, Nickerson was not discharged from the VA hospital until May 30, 2008. Thus, he was hospitalized for a total of 109 days.
Following his discharge from the hospital, Nickerson sought benefits from Stonebridge Life Insurance Company under an indemnity benefit policy that stated it would pay him $350 per day for each day he was confined in a hospital for the necessary care and treatment of a covered injury. Upon receipt of the claim, and without consulting Nickerson’s treating physicians, Stonebridge determined that Nickerson’s hospitalization was “medically necessary” only from February 11th through February 29th. Stonebridge thus 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 then sued Stonebridge alleging that Stonebridge had (1) breached the insurance contract by failing to pay him benefits for the full 109 days of his hospital stay and (2) breached the implied covenant of good faith and fair dealing by acting unreasonably in denying him his full policy benefits. Before trial, the parties stipulated that if Nickerson succeeded on his complaint, the trial court could determine the amount of attorney fees to which Nickerson was entitled under Brandt v. Superior Court (1985) 37 Cal.3d 813, as compensation for having to retain counsel to obtain the policy benefits. At trial, neither party presented to the jury evidence concerning the claim for, or amount of, Brandt fees.
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. With respect to the bad faith cause of action, the jury returned a special verdict finding that Stonebridge’s failure to pay policy benefits was unreasonable and awarded Nickerson $35,000 in damages for emotional distress. The jury also found Stonebridge had acted with “fraud” and awarded $19 million in punitive damages. After the jury rendered its verdict, the parties stipulated that the amount of attorney fees to which Nickerson was entitled under Brandt was $12,500, and the court awarded that amount.
Stonebridge then filed a motion for an order reducing the $19 million punitive damage award on the ground that the award was constitutionally excessive. Relying primarily on State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, the trial court concluded that the ratio of punitive damages to compensatory damages could not exceed 10 to 1. Thus, the trial court granted Stonebridge’s motion and reduced the punitive damages award to $350,000. In calculating the permissible amount of punitive damages, the trial court included only the $35,000 in compensatory damages the jury had awarded on the bad faith cause of action, and excluded the $12,500 in Brandt fees the trial court had awarded after the jury’s verdict.
Nickerson appealed to the California Court of Appeal, which held that in determining whether the ratio of punitive damages to compensatory damages is constitutionally excessive, the amount of compensatory damages should not include the $12,500 in Brandt fees awarded by the trial judge after the verdict. Nickerson then sought review in the California Supreme Court, which agreed to consider the matter.
Holding
The Supreme Court held that in calculating whether the ratio of punitive damages to compensatory damages is constitutionally permissible, the amount of compensatory damages should include Brandt fees whether those fees are awarded by the jury as part of the verdict or by the trial judge after the verdict. The Supreme Court emphasized that in a bad faith case, Brandt fees constitute compensatory damages. Thus, there is “no reason to exclude the amount of Brandt fees from the constitutional calculus merely because they were determined, pursuant to the parties’ stipulation, by the trial court after the jury rendered its punitive damages verdict.” In fact, to exclude such fees from consideration “would mean overlooking a substantial and mutually acknowledged component of the insured’s harm.”
The Supreme Court thus remanded the case to the Court of Appeal for further proceedings regarding the amount punitive damages to which Nickerson is entitled from Stonebridge.
Comment
While there is no absolute bright line rule for evaluating punitive damage awards, courts have generally held that when the ratio of punitive damages to compensatory damages exceeds 10 to 1, the punitive damage award is presumed excessive and thus unconstitutional. Likewise, in Nickerson , the trial judge applied, and the Court of Appeal affirmed, a punitive-to-compensatory ratio of 10 to 1. Thus, given the prior proceedings in Nickerson , one can probably expect that on remand the existing punitive damage award of $350,000 will be increased by another $125,000 (i.e., Brandt fees of $12,500 x 10 = $125,000).
In reaching its decision in Nickerson , the Supreme Court disapproved the Court of Appeal’s earlier decision in Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538. In Amerigraphics , the Court of Appeal held, without elaboration or citation, that in evaluating the ratio of punitive damages to compensatory damages, compensatory damages should not include Brandt fees when awarded by the trial court after the jury’s verdict.