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STATE FARM V. CAMPBELL: REBUTTING INSURER MYTHS
By Mike Abourezk and Marialee Neighbours
Since the United States Supreme Court decided State Farm Mutual Ins. Co. v. Campbell, 123 S.Ct. 1513 (U.S. 2003), insurers have distorted this decision. They have used Campbell to thwart discovery requests by plaintiffs for relevant information that is discoverable in bad faith actions. However, Campbell does not stand for the propositions generally asserted by insurers. Basically, Campbell affirms earlier Supreme Court guideposts regarding the constitutional analysis of punitive damages. The federal court evaluating the punitive damages award in Exxon Valdez aptly noted:
State Farm adds no new, free-standing factor to the constitutional analysis of punitive damages... It is the court's view that State Farm, while bringing the BMW guideposts into sharper focus, does not change the analysis. In fact, there are aspects of the due process evaluation of punitive damages awards which have not changed at all as a result of State Farm.
In re the Exxon Valdez, 296 F.Supp.2d 1071,1076 (D.Alaska 2004)
In addition, insurers have argued that Campbell limits punitive damages in bad faith actions. In order to rebut these arguments, it is necessary to thoroughly understand the decision and its applicability.
Campbell Does Not Address Evidence That Can Be Admitted in State Bad Faith Actions
First, Campbell did not, in any way, address the evidence that is relevant or admissible in a state court bad faith action. In fact, the Campbell appeal did not even arise out of the bad faith proceeding because the trial court in Campbell had bifurcated the trial. The bad faith issue was tried first. Then compensatory and punitive damages were tried later in the second phase of the trial. It was the second phase of the trial, pertaining to punitive damages, that State Farm appealed. Id. at 1518. The Supreme Court did not overturn the $1 million bad faith verdict at all. Therefore, the holdings in Campbell had nothing to do with the scope of admissible evidence in a bad faith action.
In Campbell, the issue before the Supreme Court was "the measure of punishment, by means of punitive damages, a State may impose upon a defendant in a civil case." Id. at 1517. Campbell dealt only with a constitutional analysis of what kinds of evidence will be considered by an appeals court in reviewing the constitutionality of a punitive damage verdict. Based on the evidence in Campbell, the Supreme Court held that a $145 million punitive damage award was excessive and exceeded due process constraints.
Specific Evidence Introduced in Campbell Could Not Be Used To Enhance Punitive Damages
Second, in order to analyze the Campbell holding, it is important to understand the specific evidence introduced in that case. In Campbell, the bad faith portion of the case had already been completed when the jury heard evidence of State Farm's conduct in the second phase of the trial. The evidence consisted of many anecdotal instances of individual claim handling from a number of other states. This evidence was offered only in respect to punitive damages since the bad faith portion of the trial had been completed. The trial court did not use any cautionary instructions, limiting use of the evidence to bad faith or to deliberateness, since the jury had already determined bad faith in the first phase of the trial. Therefore, the evidence could only go to enhance punitive damages.
The Supreme Court held that this kind of "out-of-state" evidence could not be used to enhance punitive damages. The Court reasoned that a state has no constitutionally permissible interest in punishing the defendant for conduct that occurred in another state, which is not directly connected with the harm inflicted upon the plaintiff in the state where the case is venued.
Moreover, the Supreme Court held that lawful out-of-state conduct cannot be used for purposes of enhancing punitive damages. However, the Court noted that lawful out-of-state conduct may be admissible to demonstrate that a defendant's conduct was deliberate. In this situation, a cautionary instruction must be used. Specifically, the Court said:
Lawful out-of-state conduct may be probative when it demonstrates the deliberateness and culpability of the defendant's action in the state where it is tortious, but that conduct must have a nexus to the specific harm suffered by the plaintiff. A jury must be instructed, furthermore, that it may not use evidence of out-of-state conduct to punish a defendant for action which was lawful in the jurisdiction where it occurred.
Id. at 1522-23.
Another problem with the evidence submitted in Campbell during the second phase relates to the fact that the underlying bad faith case involved a third-party lawsuit against State Farm's insured. The bad faith action was predicated on State Farm's failure to adequately protect their insured in the third-party suit. However, most of the evidence offered by the Campbells, of company wide programs to reduce claims payments, did not relate to third-party automobile insurance claims. Instead, the evidence related to first-party claims.
There are different standards of conduct in a third-party claim. An insurance company is in an adversarial relationship with a third-party. See Trouten v. Heritage Mutual Ins. Co., 632 N.W.2d 856, 864 (S.D. 2001). However, an insurance company owes a much higher duty to claims submitted by its own insured in a first-party context. Id. For instance, the Court specifically noted, in discussing State Farm's PP&R policy that most of those practices were unrelated to third-party claims:
Evidence pertaining to the PP&R policy concerns State Farm business practices for over 20 years in numerous states. Most of these practices bore no relation to third party automobile insurance claims, the type of claim underlying the Campbell's claim against the company....Relying in large part on the extensive evidence concerning the PP&R policy, the court concluded that State Farm's conduct was reprehensible.
Id. at 1519.
Evidence of Insurers' Nationwide Policies Not Precluded
Third, insurers have argued that Campbell precludes a plaintiff in a bad faith action from introducing evidence of an insurer's nationwide policies, including policies to reduce claims payments. This is not what the Court said. In Campbell, the Supreme Court said: "A Defendant's dissimilar acts, independent from the acts upon which liability is premised, may not serve as the basis for punitive damages." Id. at 1523. Because there was no evidence of similar conduct offered in Campbell, the only relevant evidence was the evidence that harmed the Campbells. Conversely, if there had been evidence of similar conduct it could have been introduced for purposes of enhancing punitive damages. Campbell merely says that the plaintiff must make a showing of a nexus between a nationwide policy and the harm suffered by the specific individual.
Most important, Campbell in no way changes South Dakota law, which favors admitting evidence of similar conduct to show intent and for other purposes specified in. S.D.C.L. §19-12-5. See Novak v. McEldowney, 655 N.W.2d 909 (S.D. 2002).
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