In Nickerson v. Stonebridge Life Ins. Co., 203 Cal.Rptr. 3d 23, 16 Cal. Daily Op. Serv. 6028 (June 9, 2016), the California Supreme Court reversed an appellate court decision and held that a post-verdict award of compensatory damages should be included in calculating the proper size of a punitive damages award, even though the jury had not been advised of those damages at the time it reached its verdict. The decision required the Court to navigate the case law imposing constitutional limits on the size of punitive damages awards and California case law allowing the recovery of attorneys’ fees as compensatory damages in insurance bad faith cases, as originally set forth in Brandt v. Superior Court, 37 Cal.3d 813 (1985).
In Nickerson, a paraplegic veteran broke his leg after falling from a wheelchair lift. Nickerson was hospitalized and, due to multiple complications, remained there for 109 days. After his discharge, he sought benefits from Stonebridge Life Insurance Company under a policy that was to pay him $350 per day for any period of hospitalization. Stonebridge reviewed the claim and, without considering the opinions of the treating physicians, determined only 18 days were “medically necessary.” Stonebridge paid $6,450. Nickerson demanded payment for all 109 days he was hospitalized ($38,150) and filed suit against Stonebridge for breach of contract and bad faith.
As part of his bad faith claim, Nickerson sought recovery of Brandt fees. Per the Brandt decision, if a policyholder proves an insurer withheld benefits in bad faith, the policyholder is entitled to recover from the insurer the attorneys’ fees the policyholder expended obtaining the withheld policy benefits. California courts have uniformly held that Brandt fees are an element of the policyholder’s compensatory damages, and they are not equivalent to recoverable costs.
The Brandt decision also recommended that parties stipulate to allow the judge to make a post-verdict determination of the amount of attorneys’ fees recoverable, rather than presenting the attorneys’ fee issue to the jury. In Nickerson, the parties thus stipulated to allow the judge to determine the amount of Brandt fees after the jury’s verdict.
At trial, the court granted Nickerson’s motion for directed verdict on the breach of contract cause of action and awarded $31,500 for unpaid benefits. The jury then returned a verdict of bad faith against Stonebridge and awarded $35,000 for emotional distress damages and $19 million in punitive damages. Thereafter, the parties stipulated to $12,500 in Brandt fees and the court awarded that amount.
Stonebridge moved for a new trial seeking a reduction in the punitive damages award, arguing that $19 million was constitutionally excessive under BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996) and its progeny. BMW v. Gore held that excessive punitive damages violate the Fourteenth Amendment of the United States Constitution. Since BMW v. Gore, case law has developed holding that a punitive damages award greater than ten times the compensatory damages award is excessive. See, State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003); accord, Simon v. San Paolo U.S. Holding Co., Inc., 35 Cal.4th 1159 (2005). The trial court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a reduction of the punitive damages to $350,000, ten times the emotional distress damages award. The trial court did not include the $12,500 in Brandt fees in calculating that reduced punitive damages award. Nickerson rejected the reduction and appealed.
The Court of Appeal held that it was proper to reduce the punitive damages award to a 10-to-1 ratio and rejected Nickerson’s argument that the Brandt fees should have been included in calculating the maximum punitive damages award. Nickerson essentially argued that he was entitled to an additional $125,000 in punitive damages if the Brandt fees were included in the calculus. The Court of Appeal also agreed the trial court should not have included the award of $31,500 for breach of contract in calculating the maximum punitive damages award because punitive damages are not recoverable for an ordinary breach of contract.
Nickerson sought review from the California Supreme Court solely to address whether the Brandt fee award should have been included in the punitive damages calculus.
The Supreme Court had little difficulty reversing the Court of Appeal. Noting that Brandt fees are, by definition, compensatory damages, the Court found no basis to ignore the Brandt fee award in calculating the constitutionally permissible amount of a punitive damages award in compliance with the 10-to-1 ratio. The Court held that the stipulation to allow the Brandt fees to be determined after the verdict was a purely procedural choice and did not impact the constitutional analysis of the punitive damages award.
The Supreme Court was not swayed by Stonebridge’s argument that the jury did not consider the Brandt fee award when it awarded its punitive damages. The Court found that Stonebridge effectively waived this objection when it stipulated to a post-verdict award of Brandt fees. Furthermore, the Court also rejected the argument because the compensatory to punitive comparison is only one of several tests courts apply to determine the reasonableness of punitive damages awarded by a jury. Other tests require a court to consider facts unknown to the jury, such as the existence of comparable state or federal penalties. The Court thus found no basis to exclude the Brandt fees from the amount of compensatory damages to be compared to the punitive damages award in deciding the maximum award that was not constitutionally excessive.
The Court reversed the Court of Appeal and remanded the case for further proceedings consistent with its decision. Ultimately, the Supreme Court’s ruling will result in an increase of the punitive damages award in favor of Nickerson from $350,000 (ten times the emotional distress damages) to $475,000 (adding $125,000 for ten times the Brandt fee award).
The impact of the Supreme Court’s decision may be underestimated because of the small amounts recovered by Nickerson on his Brandt fee claim. The Supreme Court’s decision limits Nickerson’s punitive damages to a maximum of $475,000, a far cry from the $19 million awarded by the jury. By contrast, in a heavily litigated coverage dispute, Brandt fees may total several hundred thousand dollars or even millions of dollars. In those types of cases, the inclusion of the Brandt fees into the punitive damages calculus will justify an additional 10 times the amount of those Brandt fees, or millions or tens of millions in punitive damages, that may be awarded by a jury in a bad faith case.
Despite the Supreme Court’s decision that may limit an insurer’s ability to obtain reduction of runaway punitive damages award in a bad faith case, insurers will likely still prefer stipulating to a post-verdict Brandt fee award. Although the post-verdict award can be used by the trial court in calculating a remittitur of an excessive punitive damages award, permitting the jury to hear testimony about additional compensatory injury to the plaintiff could increase the likelihood of a bad faith verdict and potentially increase the amount of the punitive damages award. Of course, that same rationale might make plaintiff’s counsel less willing to stipulate. Ultimately, the suggestion in Brandt of a post-verdict award may need to be codified by the state legislature to avoid procedural squabbles that the decision by the Nickerson court might create.
Stephen Cope is a litigator with Musick, Peeler & Garrett in its Los Angeles office. His full bio and contact information can be found at: http://www.musickpeeler.com/professional/Stephen_Cope.