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Emerging Trends in Litigation

9/23/2009 2:55:36 PM EST

Punitive Damages Find a Home in South Carolina

by Ted Zwayer

Posted by Ted Zwayer

Recently I discussed the continued viability of punitive damages, examining the recent decision of the Supreme Court of Tennessee in Flax v. DaimlerChrysler Corp., 272 S.W.3d 521 (Tenn. 2008). Although Tennessee is perceived to be a pro-business, politically conservative state, the Tennessee Supreme Court upheld a punitive damages award of $ 13,367,345 for the death of an infant in a minivan products liability lawsuit. Now the highest court of another southern state that is perceived to be pro-business and politically conservative has just upheld a multi-million dollar award of punitive damages.

In Mitchell v. Fortis Ins. Co., 2009 S.C. LEXIS 451 (S.C. Sept. 14, 2009), the insured, who was seventeen years old, applied for health insurance with the insurer because he was preparing to enter college and would no longer be covered under his mother’s insurance policy. In the application, which was dated May 15, 2001, he stated that he had never been diagnosed as having or been treated for any immune deficiency disorder by a member of the medical profession. In April, 2002, the insured attempted to donate blood to the Red Cross and it was discovered that he was HIV positive. He was referred to his personal physician, and on May 14, 2002, his physician confirmed that diagnosis. An assistant at that physician’s office though, incorrectly noted on the intake chart the date of May 14, 2001. The intake chart, though, did correctly identify him as then being eighteen years old.

The insured was referred to an infectious disease specialist for treatment, and that physician’s records indicated that the insured was found to be HIV positive as a result of the April, 2002 blood donation. The insurer then requested copies of the insured’s medical records and a medical release, which were provided. A senior underwriter for the insurer recommended that the insured’s insurance policy be rescinded solely upon the incorrect date on the intake chart. The insurer’s rescission committee, after a two-hour hearing in which they considered 46 cases, voted to rescind the insured’s policy.

The following day the insurer sent the insured a letter notifying him of the rescission, and advising him that the insurer “would welcome any additional information you may have which would effect [sic] our decision to rescind your policy." Thereafter the insured, the case manager at his medical clinic, and his insurance agent all attempted to provide proof to the senior underwriter that the date on the intake chart was a clerical error, but she declined to pursue the matter further. Several months later, the insured’s attorney filed an appeal of the rescission order, which the rescission committee denied. The insured then filed an action for breach of contract and bad faith rescission of his health insurance and sought actual and punitive damages.

During the trial, the insurer’s manager of underwriting and correspondence, who was the direct supervisor of the senior underwriter, testified that “she was ‘not able to answer’ whether she or any of her employees ‘had a responsibility to find out the truth’ about a policyholder's medical conditions.” The insured offered the testimony of an economist who testified that the total present value of the insured’s future treatment was $ 1,081,189.40. A jury awarded the insured $ 150,000 in compensatory damages and $ 15 million in punitive damages for the bad faith rescission claim. The insurer appealed, including an assignment of error that the award of punitive damages violated the insured’s constitutional right to due process.

As I noted in my previous post, in 2003 the United States Supreme Court examined the ratio that could permissibly exist between an award of punitive damages and the underlying compensatory damages and opined in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S. Ct. 1513, 155 L. Ed. 2d 585 (2003), that seldom should the ratio between punitive damages and compensatory damages exceed a single digit. The South Carolina Supreme Court found that the ratio of punitive to compensatory damages in this case exceeded due process pursuant to Campbell because the ratio was 13.9 to 1. The key factor to note, though, is that the South Carolina Supreme Court did not rely upon the actual compensatory damage award. Rather, the court relied upon the potential harm that might be suffered by the insured, the present value of future treatment calculation of $ 1,081,189.40, and thus reduced the punitive damages to $10 million, which brought the ratio to single digits.

“In our view, the conduct in this case was reprehensible enough to merit an award towards the outer limits of the single-digit ratio. See Campbell, 538 U.S. at 425 (observing that few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process). Fortis willfully disregarded Mitchell's health and safety, and the jury so found in assessing this punitive damages award. In assessing this remittitur, we place great emphasis upon that consideration. We therefore remit the punitive damages award to $ 10 million, resulting in a ratio of 9.2 to 1. We believe a $ 10 million award in this case satisfies due process and comports with South Carolina law. We are also certain that a $ 10 million award will adequately vindicate the twin purposes of punishment and deterrence that support the imposition of punitive damages.” Mitchell v. Fortis Ins. Co.

When one reads Campbell and the cases that the majority in Campbell relied upon in setting the single digit ratio, Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (U.S. 1991) and BMW of N. Am. v. Gore, 517 U.S. 559 (U.S. 1996), it would appear that the Supreme Court of the United States meant actual awarded compensatory damages were to be used in calculating the permissible ratio. Instead, the South Carolina Supreme Court seems to be relying more upon the language in TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443 (U.S. 1993), a decision without a majority opinion that has attracted much less attention, in which the United States Supreme Court allowed a $ 10 million punitive damages award with an actual compensatory damages award of $ 19,000, a 526 to 1 ratio, on the basis that the potential harm or loss was at least $ 1 million.

Even more than the pro-punitive damages decision in Flax v. DaimlerChrysler Corp., the Mitchell v. Fortis Ins. Co. decision demonstrates the continued viability and vitality of punitive damages. Since punitive damage limits are generally the province of state courts, such decisions by the highest courts of states that are perceived as pro-business and politically conservative must gladden the hearts of tort lawyers and strike fear into the minds of business and insurance counsel.