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December 12, 2002

Punitive Damages and National Regulation

In a blockbuster case, the Supreme Court is deciding whether to rewrite the civil court systems of all fifty states-- second-guessing decisions by state governments and their courts to use punitiive damages to regulate corporate abuse in their states.

The case: The case at issue involves State Farm, a Mutual Automobile Insurance Company, which started as a generic car accident. See here for details. But when the company refused for over a year to payout to an insurance holder, and it was discovered that systematic illegitimate denials of payouts were company policy, a Utah jury found such bad faith, fraud and emotional damage that the insurace holder was awarded $1 million in compensatory damages and a $145 million punitive damage award. The Utah Supreme Court held that this award was fine under its state legal rules.

Now, this is obviously an award designed to punish State Farm and force the company to change its national policies that the jury found so reprehensible.

The problem: The problem with this was stated by State Farm's attorney before the Supreme Court yesterday. Such an "incredibly excessive" verdict has the effect of turning the 12-member Utah jury into a "national insurance regulator."

And using jackpot jury awards to second-guess national regulation of insurance would be a serious problem, both on legal and policy grounds.

Except for one thing.

There is no national insurance regulator.

The insurance companies have lobbied hard for decades to prevent national regulation of their industry. They have spent billions in campaign contributions to prevent just such national regulation of their industry.

So they shouldn't be trying to cry national preemption of local court decisions. It was they who wanted a system of fifty separate legal systems governing insurance and they created a system that has frustrated consumers through its abuse and bad dealing that leads to these kinds of awards.

Solving the problem: If there is a problem-- and I will grant there is, unlike some progressives-- then the solution is national regulation, not arbitrary court limits on judgements. If states choose to regulate insurance companies by using juries to assess fines, that's their business and there is nothing in the Constitution, short of the supremacy of alternative national legislation, that should override that decision.

We are on serious tilt alert on conservative hypocrisy over states rights on this one. If State Farm doesn't like Utah's or any other states legal system, they don't have to offer insurance in that state. Some have refused to do so in various places. But for the Supreme Court to say that, despite the lack of national regulation of the industry, State Farm should have the constitutional right to offer insurance in Utah in defiance of state regulation-- as administered by state juries -- is an outrageous usurpation of power by the federal courts.

And it will do great harm to the democratic process.

If the punitive damages assessed by juries is out of control, it might encourage discussion of national insurance standards to eliminate the problem. You can envision a national legislative bargain that limits legislatively punitive damages while subjecting insurance companies to some national regulatory body that can assess fines in a hopefully more consistent manner.

But a Supreme Court decision will abort that natural legislative evolution by giving the insurance companies the tort reform rules they want without having to in exchange relent from their opposition to national regulation.

The lack of Constitutional authority: Nowhere in the Constitution is there a non-legislative guide to limits on punitive damages. As Justice Souter said yesterday:

If four times [actual damages] is O.K. and 145 times is not, how about 80 or 60, or 20? How do we grapple with that? Are we really going down the road to saying that at some point we've got to put this in a less protean state and we have to pick a number? Is it our business to do that?
The answer is obviously no.

The Unites States (in this case with the emphasis on "states") has largely decided to regulate business through our civil legal system, using a combination of compensatory and punitive damages as a substitute for the regulatory bodies used in most other developed nations. There are some advantages to our system, but the disadvantages such as arbitrary jackpot awards are making it look rickety and poorly designed for companies operating on a national and even international basis.

Instead of jury-rigging (literally) the legal system, we need to see the jury tort system as one system of regulation that may need to be replaced with another system of regulation. But that is a role for the national legislative branch, not the courts.

The Medicial Malpractice example: To give another example, medical practice claims are a serious problems, but I argued in this column a few months ago that the root of medical malpractice claims is the lack of standards of care in our society. Since rich people can buy one standard and poor are stuck with another, it is self-evident that doctors by definition are letting some people die based not on medical decisions but financial ones. And thus lawsuits fly.

The best solution, as with other forms of insurance, is establishing national standards of care and making sure everyone can afford that basic package. Countries with universal health care have lower administrative costs, partly because they avoid duplicative insurance bureaucies but partly because it's clear what gets covered and what does not, without all this legal gamesmanship.

But it is not the courts' role to impose national health coverage. That is the role of the Congress and the President, just as it is their role, not the courts, to address deficiencies in regulation of corporate abuse by jury-driven civil court systems.

Posted by Nathan at December 12, 2002 09:35 AM

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Think simple. Learn different. Macinstruct.net

Posted by: Harry at July 6, 2004 09:05 AM

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