Horvitz & Levy LLP - State Farm Mut. Auto. Ins. Co. v. Campbell

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State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408 [123 S.Ct. 1513, 155 L.Ed.2d 585].

The United States Supreme Court held in this case, by a 6-3 vote, that a $145 million punitive award against State Farm was unconstitutionally excessive. Horvitz & Levy LLP participated in the case by filing an amici curiae brief on behalf of the American International Companies (AIG), USAA, and Truck Insurance Exchange.

The case involved State Farm’s failure to settle a third-party claim within policy limits. State Farm’s insureds won a jury verdict against State Farm for the following amounts: $911.25 in out-of-pocket expenses, $2.6 million for emotional distress, and $145 million in punitive damages. The trial court reduced the emotional distress award to $1 million and the punitive award to $25 million. The Utah Supreme Court, however, concluded that the trial court erred in reducing the punitive damages award. The court determined that the $145 million awarded by the jury was a more appropriate punishment, based on evidence of the insurer’s nationwide "scheme" to reduce costs and increase profits by limiting payments on claims. As proof of this scheme, the court cited evidence of conduct that occurred outside Utah, was dissimilar to State Farm’s conduct toward the insureds, and was lawful in the states where it occurred.

The U.S. Supreme Court reversed, holding that the Utah Supreme Court erred by focusing on out-of-state conduct and conduct that was dissimilar to State Farm’s actions toward the plaintiffs. State Farm’s conduct toward the plaintiffs, although it "merit[ed] no praise," was not reprehensible enough to warrant a $145 million punishment. The Court also held that "few awards" exceeding a single-digit ratio between punitive and compensatory damages to a significant degree will satisfy due process. The Court further reasoned that, when compensatory damages are substantial, a lesser ratio is appropriate, "perhaps" no higher than one to one. Under these guidelines, the 145 to one ratio in this case was clearly excessive.

The amici curiae brief filed by Horvitz & Levy LLP expressed the concern of the insurance industry with the Utah Supreme Court’s methods for measuring State Farm’s wealth. Among other things, the brief argued that courts should not use policyholders’ surplus to measure an insurer’s wealth without considering the important solvency and loss payment functions that surplus performs. (See an Adobe Acrobat version of Horvitz & Levy LLP’s amici curiae brief.) The Supreme Court touched on this concept briefly in its opinion, holding that State Farm’s assets, "which, of course, are what other insured parties in Utah and other States must rely upon for payment of claims," could not be used to affirm an otherwise unconstitutional award.