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A federal appeals court has upheld a punitive damages award that at first glance appears to be 75 times larger than the compensatory award after finding that the trial judge’s explanation for imposing the stiff award satisfied the U.S. Supreme Court’s latest test. In Willow Inn Inc. v. Public Service Mutual Insurance Co., a unanimous three-judge panel upheld U.S. District Judge Berle M. Schiller’s decision after a non-jury trial to award $150,000 in punitive damages and $2,000 in compensatory damages. Schiller found that after the Willow Inn was severely damaged by a tornado in June 1998, PSM dragged its feet and used “stonewalling tactics” to avoid paying the full amount due on an insurance claim. In a second opinion, Schiller awarded the Willow Inn more than $135,000 in attorney fees and costs. In the first appeal, decided in 2003, the 3rd U.S. Circuit Court of Appeals upheld most of Schiller’s rulings, but found that his punitive award required more explanation due to a U.S. Supreme Court decision that came down while the case was on appeal. The Supreme Court’s April 2003 decision in State Farm Mutual Automobile Insurance Co. v. Campbell reinforced the “guideposts” the justices 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 original opinion did not explicitly apply the Gore/Campbell guideposts. On remand, Schiller concluded that his original punitive award complied 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. As a result, Schiller found that the proper measuring stick was not the compensatory award, but the full amount of the restaurant’s claim. “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.’” 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.” In a second appeal, PSM — supported by amicus briefs from the United States Chamber of Commerce and United Policyholders, an insurance industry advocacy group — argued that Schiller’s punitive award was excessive and violated the single-digit ratio rule announced in Campbell. Since the compensatory award was just $2,000, PSM argued, the punitive award should have been no more than nine times that amount, or $18,000. Now the 3rd Circuit has flatly rejected that argument, finding that the $2,000 figure was a “red herring” and should not serve as the starting point for analyzing whether the punitive award was excessive. CONTRACT CLAIM INCIDENTAL “We view the $2,000 award on Willow Inn’s contract claim to be incidental to the punitive damages award. It would be an improper term to use in the ratio analysis,” U.S. Circuit Judge D. Brooks Smith wrote. “The $2,000 award relates to only one aspect of PSM’s bad faith conduct — its unreasonable refusal to pay on the policy provision defraying Willow Inn’s costs of preparing the proof of loss — and is in no way indicative of the sum of PSM’s culpability,” Smith wrote in an opinion joined by Circuit Judges Jane R. Roth and Joseph F. Weis Jr. Instead, Smith found that the award of $135,000 in attorney fees and costs was “the proper term to compare to the punitive damages award for ratio purposes.” Using that aspect of the award as a measuring stick, Smith found there was nearly a one-to-one ratio to the punitive award. Smith said the court acknowledged that its conclusion was “not without conceptual difficulty.” Pennsylvania’s bad faith law and the Gore/Campbell ratio language “collide,” Smith found, “where, as here, an insurer’s conduct in settling and paying a claim is unacceptable, but where the claim itself was settled and paid prior to the commencement of a [bad faith] action.” Smith conceded that it was “something of a stretch to say that PSM ‘inflicted’ Willow Inn’s attorney fees and court costs on it.” But Smith found that the bad faith law, � 8371, “would be useless where, as here, the allegation is that the insurer acted in bad faith by unreasonably delaying settlement.” Section 8371′s attorney fees and costs provisions, Smith said, vindicate the statute’s policy by enabling plaintiffs such as Willow Inn to bring � 8371 actions alleging bad faith delays to secure counsel on a contingency fee. Smith found that the decision to include awards of attorney fees and costs in the ratio analysis is supported by Pennsylvania case law. A recent en banc panel of the Superior Court of Pennsylvania was unanimous in considering � 8371′s attorney fees and costs awards to be compensatory damages for Gore/Campbell multiplier purposes, Smith noted. Smith found that the Superior Court’s 2004 decision in Hollock v. Erie Insurance Exchange represented not only the state appellate court’s interpretation of Pennsylvania’s bad faith statute, but also “its judgment of how the statute fits a federal constitutional scheme.” Adopting its reasoning, Smith said he found the Hollock court’s conclusion that an award of attorney fees and costs is an apt term in the Gore/Campbell ratio analysis to be “persuasive and reasonable.” Once the attorney fees and costs were treated as compensatory damages for Gore/Campbell ratio purposes, Smith found that the ratio was one-to-one and therefore constitutional. “Further, we consider the relationship between punitive and compensatory damages here to be reasonable given the degree of reprehensibility of PSM’s conduct,” Smith wrote.

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