January 7, 2009
Written by Attorneys Claudia D. McCarron and Christopher J. DiIenno
Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In upholding a bad faith verdict, the United States Court of Appeals for the Third Circuit held the jury's punitive damages award to be unconstitutionally excessive as the ratio of punitive to compensatory damages was over 3:1. Jurinko v. Medical Protective Co., 2008 WL 5378011 (3d Cir. Dec. 24, 2008). Citing a long list of cases in which "other courts have used a 1:1 ratio... where compensatory damages are substantial," the Court held that in light of the substantial compensatory award of $1,658,345 and "the harm being exclusively economic," the punitive award should be reduced to a 1:1 ratio between compensatory and punitive damages. Id. at 11.
The bad faith action arose from a medical malpractice case in which Plaintiff, Stephen Jurinko, prevailed against Dr. Paul Marcincin, Mr. Jurinko's dermatologist, for his failure to detect a cancerous spot on Mr. Jurinko's nose. Jurinko was awarded $2.5 million, which was $1.3 million above Dr. Marcincin's insurance coverage. Id. at 3. In lieu of paying the $1.3 million excess verdict, Dr. Marcincin assigned to the Jurinkos the right to pursue a bad faith claim against Medical Protective, the doctor's insurer. In the bad faith action, Mr. and Mrs. Jurinko received a jury award of $1,658,345 in compensatory damages, and $6,250,000 in punitive damages, based on a finding of bad faith in the handling of settlement negotiations during the underlying medical malpractice suit.
Medical Protective insured both Dr. Marcincin and Dr. Edelman, a pathologist at the lab where Mr. Jurinko's cancerous skin sample was not properly analyzed. The evidence of bad faith adduced at trial included the fact that the claims adjuster, James Alff, appointed only one attorney to represent both doctors, despite knowing this created a conflict of interest that would deprive Dr. Marcincin of a defense and cross-claim. Id. at 4.
Dr. Marcincin and Dr. Edelman were also covered by the Medical Professional Liability Catastrophic Loss Fund (CAT Fund), which provided Dr. Marcincin with excess coverage and Dr. Edelman with primary coverage. During the bad faith suit, Mr. Alff testified that "he acted unreasonably and irresponsibly in settlement negotiations" in an effort to force the CAT Fund to offer more money from Dr. Edelman's policy. Id. at 8. Mr. Alff had refused to offer more than $50,000 in settlement, despite various indications that Dr. Marcincin's exposure was significantly greater.
The Court stated that "Pennsylvania has recognized that an insured may recover against an insurer which, in bad faith, fails to settle on the insured's behalf." Id. at 6, citing Birth Ctr. v. St. Paul Cos., Inc., 787 A.2d 376, 389-90 (Pa. 2001). With respect to punitive damages, the Court recognized that the Pennsylvania Supreme Court has yet to rule on whether punitive damages may be awarded based solely on a finding of bad faith, without an additional showing of wanton or outrageous conduct. The Court determined that it was not required to resolve this issue because the jury had been charged on the "outrageous" standard and returned a verdict for punitive damages based on that elevated standard of proof. Id. at 8, citing Phillips v. Cricket Lighters, 883 A.2d 439, 445 (Pa. 2005). The Court stated that "Medical Protective recklessly exposed Dr. Marcincin to the risk of an excess judgment despite knowing the case's value far exceeded $200,000." Id. at 9. Therefore, because Mr. Alff was "trying to play a negotiating tactic against the CAT Fund," there was sufficient evidence for the jury to find Medical Protective's conduct outrageous. Id.
The insurer challenged the award of punitive damages as constitutionally excessive. To determine whether the punitive damages award was grossly excessive, the Court looked to three "guideposts" previously identified by the United States Supreme Court: the degree of reprehensibility, the disparity between the harm to the plaintiff and the punitive damage award, and the difference between the punitive damages and civil penalties authorized in comparable cases. Id., citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003).
Reprehensibility is measured considering whether "the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; the harm was the result of intentional malice, trickery, or deceit, or mere accident." Id., citing Campbell, 538 U.S. at 419. The Court held that the record supported a finding that Dr. Marcincin was financially vulnerable, as Medical Protective had no knowledge that Dr. Marcincin's assignment of the bad faith claim would save him from financial hardship. The district court had also cited repeated violations in Medical Protective's refusal to tender its policy during negotiations and its assignment of only one attorney. Under the last reprehensibility factor, the Court of Appeals found that Medical Protective's bad faith conduct was intentional and no mere accident, as evidenced by the refusal to tender and the assignment of one attorney despite Mr. Alff's awareness of the conflict of interest. Id. at 10.
The Court of Appeals next turned to a consideration of the ratio between the harm and the punitive damage award, acknowledging that the United States Supreme Court had declined to create a bright-line rule, but had set forth several instructive principles. In particular, the Court focused on language stating, "[w]hen 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., citing Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 18 (1991). Here, the ratio of compensatory damages to punitive damages was over 3:1. The compensatory damages were substantial, being over $1.6 million. A review of several similar cases involving large punitive damages awards revealed that the other courts found compensatory damages awards ranging from $443,500 to $4.025 million to be substantial. As those courts reduced the punitive damages awards to a 1:1 ratio, the Court found a similar award was appropriate here.
With regard to the third guidepost, in which civil penalties are compared to the punitive award, the Court observed that the Pennsylvania Unfair Insurance Practices Act allows for a penalty of $5,000 per violation of the Act. In this case, the disparity created a ratio of 1250:1 between civil penalties and compensatory damages, which therefore, also pointed to a reduction in punitive damages as warranted.
The Court agreed that the actions taken by Medical Protective were clearly made in bad faith, and furthermore, these actions showed the kind of outrageous conduct that warranted a punitive award. However, the Court's opinion also demonstrates that in cases where the degree of reprehensibility is somewhat limited and the compensatory award substantial, federal constitutional law will not support a ratio in excess of 1:1 between compensatory damages and punitive damages. Moreover, the case provides some insight for future cases, both as to how settlement negotiation tactics may be judged and punitive damage awards scrutinized.
