On June 9, 2016, in Nickerson v. Stonebridge Life Ins. Co. (2016) 2016 Cal. LEXIS 3757, the California Supreme Court ruled that Brandt fees, either awarded by a jury or a court, must be considered to determine whether and to what extent a punitive damages award exceeds constitutional bounds.

The insured sued his insurer for breach of contract and bad faith for failure to pay benefits under an indemnity benefit policy. The policy promised to pay the insured $350 per day for each day the insured was confined in a hospital for medically necessary care and treatment of a covered injury. The insurer paid only 18 out of 109 days of hospitalization.

The case proceeded to verdict and the jury awarded the insured $31,500 for breach of contract, $35,000 for bad faith, and $19 million in punitive damages. Before trial, the parties had stipulated the trial court could determine the amount of Brandt fees post-verdict and therefore, neither party presented evidence at trial for Brandt fees. The trial court awarded the insured $12,500 in Brandt fees.

The insurer moved for a new trial seeking a reduction in the punitive damages award because it was unconstitutionally excessive. The trial court granted the motion for new trial unless the insured accepted a reduction of punitive damages to $350,000. The trial court determined that this was the constitutionally permissive punitive damages award, but did not include Brandt fees in that calculation.

The insured appealed the order granting the new trial. The Court of Appeal affirmed, holding the trial court properly reduced the punitive damages award to a 10-to-1 ratio. The Court of Appeal rejected the insured’s argument the compensatory damages should have included the $12,500 Brandt fees. The California Supreme Court granted review and reversed.

The Supreme Court cited well-established law on the dangers of punitive damages awards in view of a party’s constitutional right to due process. The Fourteenth Amendment to the United States Constitution prohibits states from imposing “grossly excessive” punitive damages awards. The United States Supreme Court has developed three guideposts that reviewing courts must consider: (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. (See BMW of N. America, Inc. v. Gore (1996) 517 U.S. 559, 568.)

The California Supreme Court focused on the second guidepost, noting that “few awards exceeding a single-digit ratio between punitive damages and compensatory damages . . . will satisfy due process.” Gore, 517 U.S. at 425. The California Supreme Court has since interpreted Gore by concluding that ratios of punitive damages to compensatory damages that greatly exceed 9 or 10 to 1 are presumed excessive and therefore unconstitutional. (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1182.)

In reversing the judgment, the California Supreme Court reasoned that, because an insurer is liable in tort for bad faith claims, Brandt fees are an economic loss proximately caused by the tort. Disregarding Brandt fees as a necessary component of the insured’s harm “skew[s] the proper calculation of the punitive-compensatory ratio.” The result impairs the reviewing courts’ full consideration of whether the punitive damages award exceeds constitutional limits.

The Court rejected the insurer’s argument that a trial court’s award of Brandt fees, as opposed to a jury’s verdict, should not be included in the calculation of compensatory damages, overruling Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538. The Court also found the insurer made a “bargain” when it stipulated to a post-verdict determination of Brandt fees without objecting to the jury’s ability to return a punitive damages verdict without considering those fees. The insurer could not leverage that bargain into a truncated application of the Gore guideposts.

Click here for opinion.

This decision is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.