Seemingly minor legal issues sometimes can have a surprisingly significant effect. That is particularly true with the ratio guidepost because the effect of any dispute about the guidepost’s application is literally multiplied. We recently filed an amicus brief on behalf of a group of organizations in an Eighth Circuit appeal that proves the point: Dziadek v. The Charter Oak Fire Insurance Company, No. 16-4070.
Dziadek involved a third-party claimant under an automobile insurance policy. In response to her counsel’s initial inquiry about potential coverage, the claimant was informed that there was no excess liability coverage for her injuries. Years later, her counsel followed up and explicitly inquired about Underinsured Motorist (“UIM”) coverage. The insurer disclosed that she was eligible for such coverage and promptly paid her subsequent claim for $900,000.
Despite payment of benefits, the claimant persisted with the lawsuit she had filed in the interim, asking for the attorneys’ fees she allegedly had incurred to secure payment of UIM benefits, prejudgment interest on the UIM benefits running from soon after her initial inquiry about coverage, and punitive damages.
The jury found that the insurer had misrepresented the availability of UIM coverage and awarded the plaintiff $250,000 in out-of-pocket expenses (attorneys’ fees), $387,511 in interest under South Dakota’s 10% prejudgment interest statute, and $2,750,000 in punitive damages. In refusing to reduce the punitive award, the trial court included the prejudgment interest in the denominator of the ratio guidepost and concluded that the resulting ratio of approximately 4:1 was consistent with due process.
Our amicus brief argues that including the above-market interest award in the denominator of the ratio is inconsistent with due process review. Even assuming that prejudgment interest can fairly be regarded as serving a compensatory function when set at market rates, the above-market statutory rate of 10% awarded under South Dakota law grossly overstates any economic loss the plaintiff may have suffered as a result of the insurer’s alleged delay in disclosing the availability of UIM coverage.
The prime rate during the relevant time period, for example, ranged from 3.25% to 3.5%. Accordingly, including the above-market award of interest in the denominator distorts the due process inquiry and prevents courts from reliably determining whether the punishment imposed on the defendant bears a reasonable relationship to the harm that the defendant’s conduct caused the plaintiff. Indeed, because the above-market portion of an award of interest already serves to punish the defendant, placing the interest in the denominator both overstates the actual harm suffered by the plaintiff and understates the amount of punishment imposed on the defendant.
More broadly, adding prejudgment interest to the denominator undermines the Supreme Court’s goal of ensuring consistency of punitive awards across similar cases because the maximum constitutionally permissible award could vary wildly depending on the happenstance of whether the state in which the case was filed uses a market or above-market rate for prejudgment interest—or doesn’t allow prejudgment interest at all, as is often the case when the plaintiff’s claim is not for a liquidated sum. For example, assuming for present purposes that a 4:1 ratio is constitutionally permissible, the maximum permissible punitive award in Dziadek would fluctuate by over $1,000,000—more than 33%—depending entirely on whether the case was filed in South Dakota or next door in Iowa, which uses a prejudgment interest rate that tracks the market. That is not what the Supreme Court had in mind when emphasizing the importance of “fairness as consistency” in the imposition of punitive damages.
For these reasons, we argue that the Eighth Circuit should either exclude prejudgment interest from the ratio guidepost entirely or assign a market rate of interest to the denominator and the balance of the award (which serves an entirely punitive function) to the numerator. While the effect of this seemingly minor aspect of the ratio guidepost is significant in Dziadek, it is not hard to imagine other cases in which the question could have an even more dramatic effect, changing the outcome of a court’s due process review by tens of millions of dollars.
Our amicus brief also points out that the district court deviated from the modern trend by refusing to reduce the punitive damages to the amount of compensatory damages or lower even though the compensatory damages unquestionably were substantial and the alleged conduct was nowhere near the high end of the spectrum of punishable conduct. Like the Supreme Court in Exxon Shipping Co. v. Baker, we think that courts should be imposing ratios of 1:1 or less in almost every case in which the compensatory damages are substantial and the conduct is not exceptionally reprehensible. The Eighth Circuit has followed that rule in the past and we hope that it will reaffirm the Supreme Court’s repeated 1:1 guidance in Dziadek.
Finally, our brief discusses a number of errors that the district court made in applying the reprehensibility guidepost. Most fundamentally, the court failed to compare the alleged conduct in Dziadek—misrepresentations made by a low-level claim handler to a sophisticated attorney—with other punishable acts such as discrimination or physical assault.
The district court’s analysis of the five reprehensibility factors identified by the Supreme Court also was systematically mistaken. The court found physical harm and disregard for a risk to health or safety because the plaintiff felt emotional distress. In State Farm, however, the Supreme Court itself cast serious doubt on that interpretation of the physical harm and disregard factors, concluding that the insurer’s misconduct in that case—which likewise caused emotional harm—arose out of the economic realm. Many lower courts have followed the Supreme Court’s lead, insisting that these two factors relate solely to physical injuries.
The district court found financial vulnerability simply because the plaintiff needed the insurance benefits. Courts have noted, however, that this factor requires evidence that the defendant set out to target individuals who were financially vulnerable, and there was no evidence of that in Dziadek. And the district court mistakenly believed that the repeat-misconduct factor applied because the alleged misrepresentations spanned several years. This factor, however, is intended to more severely punish recidivists, and there was no evidence in Dziadek of a pattern of similar activity by the insurer’s claims staff.
On each of these points, the district court’s conclusion was contrary to prevailing law interpreting the reprehensibility guidepost and falsely portrayed the insurer’s conduct as particularly egregious when, in fact, it was on the far low end of the spectrum of conduct for which punishment may be imposed.