Utah Ruling Turns Juries Into Regulators, InsurersContend

Washington

State regulation of insurance would be effectively undermined ifa $145 million punitive damage award against State Farm is allowedto stand, four major property-casualty trade associations told theUnited States Supreme Court.

In a brief filed with the high court in the case of StateFarm v. Campbell, the associations said that unless the awardis overturned, a single jury in any state could become, in effect,a national insurance regulator.

“A state may not extend its insurance regulatory powerextraterritorially to reach conduct occurring outside itsboundaries,” the associations said in their brief.

The brief was filed jointly by the Des Plaines, Ill.-basedNational Association of Independent Insurers, theIndianapolis-based National Association of Mutual InsuranceCompanies, the Washington-based American Insurance Association, andthe Downers Grove, Ill.-based Alliance of American Insurers.

The issue involves a $145 million punitive damage award againstthe Bloomington, Ill.-based State Farm for alleged bad faith claimhandling and intentional infliction of emotional distress.

The plaintiffs in the case, a State Farm policyholder namedCurtis B. Campbell and his wife Inez, charged that State Farmexercised bad faith by refusing to settle claims arising from anautomobile accident for which Mr. Campbell was subsequently foundto be 100 percent liable.

The jury awarded the other parties to the accident damages thatexceeded Mr. Campbells policy limits.

Although State Farm ultimately paid all the damages from theaccident, including the excess, Mr. Campbell sued the company forbad faith for its decision not to settle.

Mr. Campbell charged during the trial that State Farms decisionwas part of a “national scheme” designed to meet corporate fiscalgoals by capping payouts.

The jury awarded Mr. Campbell $2.6 million in compensatorydamages and $145 million in punitive damages.

The trial court judge reduced the punitive award to $25 million,but the $145 million figure was reinstated by the Utah SupremeCourt.

During the Utah Supreme Court proceeding, State Farm argued thatthe trial court erred in allowing Mr. Campbell to present evidenceof a so-called “national scheme.” State Farm said allowing thisevidence violated the Utah Rules of Evidence because it had nothingto do with the companys conduct towards Mr. Campbell.

However, the Utah Supreme Court rejected State Farms argument.It justified the $145 million award, charging, among other things,that State Farms “fraudulent conduct has been a consistent way ofdoing business for the last 20 years.”

In their brief to the U.S. Supreme Court, the insurance tradeassociations argue that the Utah Supreme Court, by allowing thedisputed evidence, transformed the jury from a factfinder in aparticular case into a national regulator of insurance.

The jury award, the brief says, is based on a nationwidespectrum of dissimilar “other act” evidence that has no causalrelationship to the plaintiffs injury.

“The Utah courts have thus created a process that impermissiblyinfringes on the regulation of the business of insurance by theseveral states,” the brief says.

In exercising their insurance regulatory powers, the brief says,states make individual and sometimes very different decisions as towhat types of insurance practices should be prohibited orpermitted.

“The Utah jury has superseded these state-by-state judgments byconducting a national review of a wide variety of State Farmsunderwriting, coverage and claims handling practices, and then,without any instruction on the law of other jurisdictions, awardingpunitive damages based on the jurors disapproval of thosepractices, without any formal determination of their legality,” thebrief says.

Many of these practices, the brief says, are plainly lawful andeven encouraged in the states where they occurred.

The Utah courts, in effect, granted the jury the authority toconduct a nationwide compliance audit of business practices, thebrief says.

This, the brief adds, exceeds the institutional competence ofthe jury.

The Supreme Court will hear the case during its upcoming2002-2003 term.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 26, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.