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In one of the first lower court decisions to implement the U.S. Supreme Court’s latest pronouncements on punitive damages, a federal judge has reaffirmed a punitive award in an insurance bad faith case that at first glance appears to be 75 times larger than the compensatory award. After a bench trial in 2002, U.S. District Judge Berle M. Schiller found that the Public Service Mutual Insurance Co. had acted in bad faith in its handling of a claim by owners of the Willow Inn over damage by a June 1998 windstorm. Even though there was no dispute about coverage, Schiller said, the plaintiff did not receive the insurance proceeds from PSM until more than two years after the date of the windstorm. Schiller awarded $2,000 in compensatory damages and $150,000 in punitive damages. The judgment swelled significantly when Schiller awarded more than $128,000 in attorney fees to attorney Howard G. Silverman of Kane & Silverman. On appeal, PSM’s lawyers, Edward M. Koch and Louis J. Brown of White & Williams, argued that Schiller’s verdict was wrong, and that his punitive award was excessive. The 3rd U.S. Circuit Court of Appeals scheduled oral argument in The Willow Inn Inc. v. Public Service Mutual and told the lawyers that the only issue the judges were interested in hearing about was the alleged excessiveness of the punitive damages. But on April 7, 2003, just a few days before oral argument was to be held, the U.S. Supreme Court handed down its opinion in State Farm Mutual Automobile Insurance Co v. Campbell in which the justices reinforcing the “guideposts” it had enunciated in the 1996 decision in BMW of North America Inc. v. Gore. As explained in Campbell, the three guideposts are: (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. The 3rd Circuit found that Schiller’s opinion did not explicitly apply the Gore/Campbell guideposts. In a per curiam opinion, the 3rd Circuit vacated the award and remanded the case to Schiller “for a determination on the punitive damages issue in accordance with the Supreme Court’s dictates in Gore/Campbell.” The court found that Schiller was “in the best position to first determine whether to allow a punitive damages award, and, if so, the quantum of those damages. To be sure, the district judge presided over a two-day bench trial, observed the demeanor of witnesses, listened to witness testimony, and gained an overall sense of the case.” Now Schiller has concluded that his original punitive award complies with the Gore/Campbell standards — even though it might appear to be 75 times larger than the compensatory award. Since the insurer ultimately paid the claim — albeit two years late — Schiller found that the compensatory damages were limited to $2,000. “Here, the punitive damages award of $150,000 is approximately equal to the value of the Willow Inn’s claim under the policy and the payment that it belatedly received,” Schiller wrote. “Because the amount of punitive damages awarded is based on the value placed on the amount of the Willow Inn’s potential harm, the ratio at issue is approximately one to one — a ratio that does not ‘raise a suspicious judicial eyebrow,’” Schiller wrote. Applying each of the three guideposts, Schiller found that “three of the aggravating factors associated with particularly reprehensible conduct are present.” The plaintiff was “financially vulnerable,” Schiller said, noting that “at the time of the storm, the Willow Inn was a relatively modest family-run business which also served as the residence of certain family members.” As a result, Schiller said, “the need for obtaining the insurance proceeds was particularly pressing.” In Gore, Schiller said, the Supreme Court also noted that “repeated misconduct is more reprehensible than an individual instance of malfeasance.” PSM’s bad faith, Schiller said, “was not the result of one specific event, but, rather, a series of instances in which PSM failed or refused to act on plaintiff’s claim.” Finally, Schiller found that the “unreasonable delay” in paying the claim was not the result of “mere accident.” At trial, Schiller said, PSM “offered no credible basis for its substantial delay … rendering its conduct ‘outrageous.’ Put differently, PSM’s conduct was more than negligent, evincing reprehensibility within the Gore/Campbell framework.”

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