By Mike Abourezk, Alicia Garcia and Marialee Neighbours


In insurance bad faith cases, insurance companies often urge courts to reduce punitive damages awards when the amount of economic damages is small. In South Dakota, punitive damages may not be awarded absent an award of compensatory damages. Olson-Roti v. Kilcoin, 653 N.W.2d 254 (S.D. 2002). However, the fact that economic damages are small does not preclude a higher punitive damages award.

Higher Ratio Of Punitive Damages to Compensatory Damages May be Justified.

The United States Supreme Court addressed this issue in State Farm Mut. Auto. Ins. v. Campbell, 123 S.Ct. 1513 (U.S. 2003). In Campbell, the Court said that the ratio of permissible punitive damages to compensatory damages may be higher in cases involving: (1.) a particularly egregious act; (2.) where injury is hard to detect; or (3.) the monetary value of non-economic harm is difficult to determine:

. . . because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those we have previously upheld may comport with due process where "a particularly egregious act has resulted in only a small amount of economic damages." ( . . . a higher ratio might be necessary, where 'the injury is hard to detect or the monetary value of non-economic harm might have been difficult to determine').

Id., 123 S.Ct. at 1524, quoting BMW v. Gore, 517 U.S. 559, 582, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996)(emphasis in original).

Harm Caused By Bad Faith Is Not Purely Economic.

Wrongfully denying insurance benefits to an insurance claimant generally causes harm that is not purely economic. Insurance contracts are unique. Insurance is purchased to provide peace of mind. Kent v. Lyon, 555 N.W.2d 106,112 (S.D. 1996). As the Utah Supreme Court recognized on remand in Campbell:

[M]isconduct which occurs in the insurance sector of the economic realm is likely to cause injury more closely akin to physical assault or trauma than to mere economic loss. When an insurer callously betrays the insured's expectation of peace of mind, as State Farm did to the Campbells, its conduct is substantially more reprehensible than, for example, the undisclosed repainting of an automobile which spawned the punitive damages award in [BMW v.] Gore.

Campbell v. State Farm, 98 P.3d 409, 415 (Utah 2004), cert.denied 125 S.Ct.114 (U.S. 2004).

Undoubtedly, the harm suffered by most insurance claimants is the kind of injury that is hard to detect and involves a monetary value of non-economic harm that is difficult to determine.

Where Compensatory Damages Small, Appropriate To Consider Potential Harm To Plaintiff and Other Victims.

An appropriate consideration in calculating punitive damages where compensatory damages are small is the potential harm to the plaintiff and other victims if the insurer's conduct is not deterred. In Roth v. Farner-Bocken Co., the South Dakota Supreme Court emphasized that an appropriate consideration in calculating punitive damages is the defendant's actions as it relates to potential harm that may be inflicted on not only the present victim, but also other victims if it was not deterred. Fritzmeier v. Krause Gentle Corp., 669 N.W.2d 699, 710 (S.D. 2003), citing Roth, 667 N.W.2d at 668 62 (S.D. 2003)(citing Pulla v. Amoco Oil Co., 72 F3d 648, 65-60 (8th Cir. 1995).

In TXO Production v. Alliance Resources, cited in Roth, the United States Supreme Court explained:

It is appropriate to consider the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded, as well as the possible harm to other victims that might have resulted if future behavior was not deterred.

TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 460, 113 S.Ct. 2711, 2722 (1993)(emphasis in original).

The TXO court quoted this passage with approval:

For instance, a man wildly fires a gun into a crowd. By sheer chance, no one is injured and the only damage is a $10 pair of glasses. A jury reasonably could find only $10 in compensatory damages, but thousands of dollars in punitive damages to teach a duty of care. We would allow a jury to impose substantial punitive damages in order to discourage future bad acts.

509 U.S. at 459-60, 113 S.Ct. at 2711(citation omitted).

The rationale expressed in TXO, adopted by the South Dakota Supreme Court, is persuasive. The approach is consistent with the purpose of awarding punitive damages: " to punish the wrongdoer and deter others from wrongdoing." See Hoff v. Bower, 492 N.W.2d 912, 915 (S.D. 1992). Clearly, the potential harm to the plaintiff and other victims may justify a higher punitive damage award in a bad faith case even though the amount of economic damages is small.

Larger Punitive Damages Award Necessary To Deter Socially Unacceptable Acts and Discourage Perpetuation of Objectionable Corporate Policies.

In Trouten v. Heritage Mut. Ins. Co., a bad faith case, the South Dakota Supreme Court noted that the principle purpose of punitive damages is to deter acts deemed socially unacceptable and, consequently, to discourage the perpetuation of objectionable corporate policies:

In the present context, the principal purpose is to deter acts deemed socially unacceptable and, consequently, to discourage the perpetuation of objectionable corporate policies.... Traditional arguments challenging the validity of exemplary damages lose force when a punitive award is based on this justification. The special relationship between the insurer and the insured illustrates the public policy considerations that may support exemplary damages in cases such as this.

632 N.W.2d at 863, quoting Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal. Rptr. 691, 620 P.2d. 141 (1979).

In bad faith cases, higher punitive damages awards may be necessary to deter socially unacceptable acts and to discourage the perpetuation of objectionable corporate policies. For instance, in Torres v. Travelers Insur. Co., which resulted in a South Dakota Federal District Court verdict, the plaintiff's economic damages were relatively small. However, the potential harm to the plaintiff and other victims warranted a 12 million dollar punitive damages award. In that case, there was evidence that Travelers established employee incentive plans that encouraged denial of insurance benefits to claimants. Thus, the potential damage to other victims, other insurance claimants, was substantial.

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