VII. BMW of North America v. Gore: Preserving Punitive Damages To Deter and Punish Reprehensible Conduct

VII. BMW of North America v. Gore: Preserving Punitive Damages To Deter and Punish Reprehensible Conduct

A. The Three Guideposts of BMW

In BMW of North America v. Gore, ("BMW") the issue of punitive damages arose in the following context:

In January, 1990 Dr. Ira Gore, Jr. purchased a black BMW sports sedan for $40,000 from an authorized BMW dealer in Birmingham, Alabama. Upon learning that the automobile had been repainted prior to the sale, Dr. Gore brought suit against BMW of North America. Dr. Gore alleged that the failure to disclose that the car had been repainted constituted fraud, and he sought compensatory as well as punitive damages. At trial, BMW acknowledged that its policy was to repair cars that were damaged during manufacture or transportation without advising the dealer of such repairs when the repair cost did not exceed 3% of the retail price of the car.

The jury found that BMW was liable for compensatory damages of $4,000 as well as for $4 million in punitive damages. On appeal, the Alabama Supreme Court held that the punitive damages award did not exceed the constitutionally permissible amount, yet reduced the award to $2 million on the ground that the jury had improperly punished BMW for transactions outside Alabama. The United States Supreme Court granted certiorari, vacated the award and remanded the case to the Alabama Supreme Court, finding the actual harm slight and the misconduct to be minor: "None of the aggravating factors associated with particularly reprehensible conduct is present." On remand, the Alabama Supreme Court recently reduced the punitive damages award to $50,000.

BMW recognizes the long-standing notion that reprehensible conduct is a factor in determining how much, not why not, punitive damages should be awarded to an aggrieved party. The Court in BMW offered three "guideposts" to gauge whether a punitive damages verdict violates substantive due process: First, the degree of reprehensibility of the misconduct; second, the relationship between the punitive award and the actual harm; and third, the relationship of the award to other civil or criminal penalties imposed for comparable conduct.

The Supreme Court explained that "[p]erhaps the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct." The court emphasized that the primary goal in awarding punitive damages is to punish and deter egregious conduct:

[W]e have consistently rejected the notion that the constitutional line is marked by a simple mathematical formula, even one that compares actual and potential damages to the punitive award. Indeed, low awards of compensatory damages may properly support a higher ratio than high compensatory awards if, for example, a particularly egregious act has resulted in only a small amount of economic damages.

Thus, although noting that the 500-1 ratio in actual damages to punitive damages awarded in BMW was "breathtaking," the Court refused to rule out the potential for granting high punitive awards even where the damages are low. This point is particularly important: Insurance company bad faith often involves relatively small amounts of damages suffered by vulnerable parties as a consequence of egregious insurance company misconduct.

The third guidepost in the Supreme Court's analysis in BMW requires a reviewing court to compare "the punitive damages award and the civil or criminal penalties that could be imposed for comparable misconduct." A court determining whether an award of punitive damages was excessive must "accord 'substantial deference' to legislative judgments concerning appropriate sanctions for the conduct at issue." The Supreme Court's decision in BMW makes clear that any review of a punitive damages award must include a thorough consideration of all applicable criminal and civil penalties, including the maximum available penalty. In the insurance context, 48 states have specifically passed statutes which have allowed penalties -- often severe, such as revocation of license -- to be meted out against insurance companies who have acted unfairly toward their policyholders.

Further, the Court emphasized that the facts of BMW made the Court's decision inapplicable to many punitive damages cases, especially cases which involved reprehensible conduct and involved more than economic damages:

[N]one of the aggravating factors associated with particularly reprehensible conduct is present. The harm that BMW inflicted on Dr. Gore was purely economic in nature . . . [T]his case discloses no deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper motive, as were present in Haslip and TXO.

The facts of BMW are a far cry from the facts of a typical bad faith action brought by a policyholder against an insurance company. BMW clarifies that punitive damages should apply to situations which involve conduct as egregious and reprehensible as insurance company bad faith. In light of the "special relationship" between insurance companies and their policyholders, the threat of punitive damages remains one of the few effective means to curb insurance company bad faith and enforce the duty of good faith and fair dealing.

B. Post BMW Decisions

BMW did not obliterate punitive damages. Although Federal courts appear more willing than state courts to reduce punitive damage awards in light of BMW, it is not clear that these awards would not have been reduced regardless of the decision in BMW; tempering punitive damage awards is hardly a new undertaking for most courts. State court opinions, on the other hand, usually note that BMW was specifically concerned with purely economic harms and that the Supreme Court had rejected a mathematical brightline test to determine the excessiveness of punitive damage awards. For instance, the Supreme Court of South Dakota refused to reduce a $750,000 punitive damages award for fraudulent sale in oil and gas partnerships. Although the ratio of damages was 30 to 1, the court focused on the lack of any mathematical standard in BMW.

The Supreme Court of Idaho upheld a $3.2 million punitive damages award for fraudulent sales of cancer insurance policies involving post-claim underwriting. In language apropos to all claims involving insurance company bad faith, the court held:

Repainting BMWs prior to sale does not rise high on the reprehensibility scale. Misrepresenting insurance coverage and refusal to pay a claim that any reasonable person would say is due does rise high on the reprehensibility scale.

Similarly, in addressing the BMW court's concern over punitive damages which impermissibly inflict punishment beyond the borders of the jurisdiction, the court succinctly noted:

The evidence in BMW v. Gore [] indicates that approximately 60 percent of the vehicles that were refinished were sold in states where failure to disclose the repair was not an unfair trade practice. The issues in this case are more fundamental in their application throughout the states . . . . It is highly unlikely that the decision in this case infringes on the interests of other states, because it is highly unlikely that any state sanctions, approves, or trivializes fraud or bad faith settlement practices.

It was not lost on the court that BMW was unlike the traditional insurance company bad faith case. The court noted that unlike the facts in BMW, the record in Walston "demonstrates deliberate false statements and acts of affirmative misconduct." Finally, the court stressed that although the ratio of punitive to compensatory damages was just under 26 to 1 and greater than the ratio in TXO, "the U.S. Supreme Court in BMW made it clear that it was not prescribing a mathematical formula to be followed."

The high courts of at least two other states have partially reinstated punitive damage awards, citing BMW. In addition, at least two federal cases have used BMW to uphold awards of punitive damages. In Scribner v. Waffle House Inc., a case involving "severe and pervasive sexual harassment," the court reviewed an award of $8 million in punitive damages according to the BMW guideposts. The court concluded that a "significant award of punitive damages is required to punish Waffle House for its egregious conduct and to deter it from engaging in such reprehensible wrongdoing in the future." The court stressed the need to send a "wake-up call" in order to deter future misconduct and noted that BMW had rejected a "simple mathematical formula" to determine the excessiveness of punitive damages. Similarly, the 7th Circuit upheld an award of punitive damages in a civil rights action against prison guards, citing BMW for the proposition that "a mechanical ratio . . . would not make good sense."

But perhaps the most telling indicator that BMW was concerned about curtailing excessive punitive damages involving economic harms comes from the U.S. Supreme Court itself. While considering BMW, the Court had accumulated an additional 18 punitive damages cases. After deciding BMW, rather than remanding all 18 cases back for reconsideration in light of BMW, as is customarily done, the court remanded only six cases for reconsideration - the cases involving purely economic injury. The court denied or dismissed the appeals in the remaining cases, effectively upholding the award of punitive damages in those cases. In doing so, the court sent a clear message -- BMW is concerned with cases where punitive damages are awarded for purely economic harms.

BAD FAITH IN INSURANCE COVERAGE DISPUTES AND THE PUBLIC NATURE OF INSURANCE -- UNDERSTANDING THE RECOVERY TOOLS AVAILABLE TO POLICYHOLDERS

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last modified Dec 29, 2003 / 12:53 AM, GMT