Has Exposure To Punitive Damages Increased In Arizona?
Until recently, it was generally accepted that punitive damages awards are to track awards of compensatory damages on a 1:1 ratio. This ratio was convenient for defendants, as it provided some amount of certainty when evaluating potential exposure to punitive damages. But in August 2014, the Arizona Court of Appeals altered this understanding with its ruling in Arellano v. Primerica Life Ins. Co., 235 Ariz. 371, 332 P.3d 597 (App. 2014). Specifically, the Court of Appeals reduced a punitive damages award from a 13:1 ratio to a 4:1 ratio. While the reduction was welcome, it was a clear signal that the amount of punitive damages awardable in Arizona is likely to increase.
Limitations on Punitive Damages
An award of punitive damages is an extraordinary civil remedy that is recoverable only for the most egregious of wrongs. Punitive damages are not intended to compensate plaintiffs, but exist to punish the wrongdoer and deter future harmful conduct. Exxon Shipping Co. v. Baker, 554 U.S. 471, 492 (2008). Such awards are not, however, without constitutional restraints. “A grossly excessive punitive damage award violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution because the defendant did not have ‘fair notice’ of its exposure to the extent of punishment that could be imposed.” BMW of North America, Inc. v. Gore, 517 U.S. 559, 574-75 (1996).
When reviewing whether a punitive damages award is excessive, a court must consider the following guideposts: 1) the degree of reprehensibility of defendant’s conduct, 2) the disparity between plaintiff’s actual or potential harm and the punitive damages award, and 3) the difference between the jury’s punitive damages award and the authorized civil penalties in comparable cases. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 409 (2003). The degree of reprehensibility of defendant’s conduct is “perhaps the most important indicium of reasonableness of a punitive damages award.” Gore, 517 U.S. at 575. And in assessing reprehensibility, a court considers whether: 1) the harm caused was physical as opposed to economic, 2) the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others, 3) the target of the conduct had financial vulnerability, 4) the conduct involved repeated actions or was an isolated incident, and 5) the harm was the result of intentional malice, trickery, or deceit, or mere accident. Nardelli v. Metro Grp. Prop. and Cas. Ins. Co., 230 Ariz. 592, 610, 277 P.3d 789, 807 (App. 2012). Within this reprehensibility scale, acts of violence or threats of bodily harm are the most reprehensible, followed by acts taken in reckless disregard for others’ health or safety, affirmative acts of trickery and deceit, and finally, acts of omission and mere negligence. Hudgins v. Southwest Airlines, Co., 221 Ariz. 472, 490, 212 P.3d 810, 828 (App. 2009).
Turning toward the second guidepost – the disparity between actual or potential harm and the punitive damages award – “single digit multipliers are more likely to comport with due process, and a factor more than four comes close to the line of constitutional impropriety.” Id. at 491, 212 P.3d at 829. That said, there is no bright line ratio that is accepted. A high ratio is justified if a particularly egregious act results in a small amount of damages or such damages are difficult to compute. State Farm, 538 U.S. at 425. Conversely, when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. Id.
Finally, the third guidepost instructs that the court compare the punitive damages award to authorized civil penalties in similar cases. Insofar as comparable civil penalties exist, an award of punitive damages should be in line with such penalties. This is normally the least useful of the guideposts.
The Court of Appeals’ Analysis in Arellano
Arellano involved breach of contract and bad faith claims based on the denial of a claim for life insurance benefits. Mrs. Arellano purchased a $150,000 life insurance policy for her husband, which she was told was “immediately in effect” with the payment of the policy premium. In light of Mr. Arellano’s hypertension and the fact that his age was incorrectly stated on the application, Primerica required an underwriting medical interview. But when its outside vendor contacted Mr. Arellano for the interview, Mr. Arellano stated that his wife had already purchased a policy from a different company. The vendor issued an alert to Primerica that Mr. Arellano cancelled the application, but Primerica did not contact the Arellanos to resolve whether it had, in fact, been cancelled.
Shortly thereafter, Mr. Arellano suddenly died, and his wife submitted a claim for death benefits. Primerica denied the claim, asserting there was no policy or coverage because Mr. Arellano failed to complete the medical interview. Mrs. Arellano sued Primerica and asserted various claims, including breach of contract, bad faith and forgery (based on an attempt to reduce the $150,000 policy limit to $100,000). The jury found in favor of Mrs. Arellano, awarding her $82,000 on the bad faith claim and $1,117,572 on the punitive damages claim. On appeal, Primerica asserted that the punitive damages award was excessive and violated due process.
To evaluate whether the award of punitive damages was excessive, the Arizona Court of Appeals utilized the Gore guideposts described above. Focusing first on reprehensibility, it concluded that Primerica’s actions reached the middle to high range on the reprehensibility scale. Specifically, the Court of Appeals noted that the jury found Primerica had forged the Arellanos’ signatures in an attempt to reduce the life insurance policy from $150,000 to $100,000. It also noted that Primerica accepted the premium payment without properly obtaining the Arellanos’ signatures, failed to provide copies of the application for the Arellanos to verify information, and failed to follow up with the Arellanos after the medical interview was cancelled.
Turning toward the disparity between the harm and the punitive damages awarded, the Court of Appeals found that a 13:1 ratio of punitive damages to compensatory damages was excessive and violated due process. Finally, the Court of Appeals compared A.R.S. § 20-456.B (which allows for a $50,000 civil penalty for unfair practices and fraud) to the punitive damages award of more than $1,000,000. It noted that the civil penalty and punitive damages award were vastly different, but it reiterated that Primerica’s reprehensible conduct supported an award that exceeded a 1:1 ratio.
After performing this analysis and applying the Gore guideposts, the Arizona Court of Appeals relied on Primerica’s conduct being found on the middle to high range of the reprehensibility scale and reduced punitive damages from a ratio of 13:1 to 4:1.
Analyzing Punitive Damages Moving Forward
It is clear that an analysis of punitive damages exposure should start with and focus on the degree of reprehensibility of the defendant’s conduct. This is the most significant factor that will be considered, and acts of intentional physical violence will be seen as the most reprehensible, followed by acts of reckless disregard, affirmative acts of deceit, and finally, mere negligence. It is unlikely that a double digit ratio of punitive damages to compensatory damages will pass Constitutional muster even for the most egregious conduct. But reprehensible conduct found on the high range of the scale could very well support a ratio of 7:1 or 8:1. Conversely, reprehensible conduct on the low range of the scale would appear to fairly justify a punitive damages award in the range of 1:1.
Ultimately, Arellano likely caused the value of punitive damages claims to increase in Arizona, particularly where the punitive conduct is rather reprehensible. To limit awardable punitive damages, the defense should focus on reducing the impact of the allegedly egregious conduct on the reprehensibility scale.