The decision in the case of State Farm v. Campbell held that a $145 million punitive damage award in a Utah case in which compensatory damages were assessed at $1 million was excessive and violated the Due Process Clause of the 14th Amendment.

In issuing its 6-3 opinion, the high court noted that the punitive damage award was calculated, in part, by presenting evidence of alleged misconduct by State Farm in other states, even though State Farms actions may have been legal in the states where they occurred.

However, the Supreme Court said, a state cannot punish a defendant for conduct that is legal where it occurred.

“A basic principle of federalism is that each state may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each state alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction,” the court said in a opinion written by Justice Anthony M. Kennedy.

Moreover, the court said, many of these acts bore no relationship to the those at issue in the case. “A defendants dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages,” the court said.

“A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business,” the court added.

Mr. Schwartz said the decision makes clear that punitive damages should focus on the wrongful conduct of the particular plaintiff, not a “broad dragnet sweep” of the defendants out-of-state conduct.

Insurance groups also hailed the decision. Peter Bisbecos, legislative and regulatory counsel for the Indianapolis-based National Association of Mutual Insurance Companies, said the decision shows that juries have an important but limited role in punishing specific wrongs.

“We believe this decision will return a measure of fairness to our civil justice system, Mr. Bisbecos said.

Monika McGuire, assistant general counsel with the Des Plaines, Ill.-based National Association of Independent Insurers, said the high court “rang the tort reform victory bell” by saying that fairness and reasonableness need to be the priorities in awarding punitive damages.

David Snyder, general counsel with the Washington-based American Insurance Association, said that the decision draws clear standards for the types of evidence that may be admitted to determine punitive damages. This holding on the standards of evidence, he said, makes this case “very significant.”

Joyce Kraeger, an attorney with the Downers Grove, Ill.-based Alliance of American Insurers, said that the decision is also a victory for state regulation.

By considering out-of-state conduct in its punitive damage award, the Utah court usurped the authority of state insurance regulation. If allowed to stand, she said, the case would have transformed the role of a jury from that of being a fact finder in a particular dispute into a national regulator of insurance.

In the State Farm case, the Bloomington, Ill.-based company was sued for alleged fraud and intentional infliction of emotional distress resulting from an auto insurance claim.

During the trial, the plaintiff was allowed to present evidence of a so-called “national scheme” on the part of State Farm to cap claims payments and meet corporate goals. Partly on the basis of this evidence, detailing practices that occurred over a 20-year period, the company was hit with a $145 million punitive damage judgment.

The Supreme Court noted that in previous cases, it has outlined a three-part guidepost to determine the constitutionality of punitive damage awards.

The three factors are the degree of reprehensibility of the defendants conduct, the disparity between the harm and the award, and the difference between the award and criminal penalties imposed in comparable cases.

Regarding the first factor, the high court said the $145 million figure was based on out-of-state conduct that had no relationship to the auto claim at hand.

As for the second part, the disparity between the award and the harm, the court noted that the punitive damage award was 145 times the amount awarded for compensatory damages.

The court said that while it did not want to establish a concrete limit on the ratio between the award and the harm, in practice a “single digit” ratio will satisfy due process.

The presumption against the constitutionality of a 145-to-1 ratio is “substantial,” the court said.

Finally, as to the third guidepost, the court noted that the most relevant civil sanction under Utah law for an act of grand fraud is $10,000, which is dwarfed by the $145 million punitive damage award.

The court said that rather than $145 million, a punitive damage award at or near the compensatory figure of $1 million would likely be justified.

Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.