How Companies Should Minimize Their Punitive Damage Award Risk

How Companies Should Minimize Their Punitive Damage Award Risk

The size of punitive damages, which are intended to punish a defendant for misconduct, are spiraling to new levels and increasing companies’ punitive damage award risk.

According to the Institute for Legal Reform, the median punitive award in 2017 was $35 million. By 2022, the median punitive damage award increased by nearly 250% to $87 million, and the mean punitive damage award in 2022 exceeded $690 million. Juries are becoming numb to the enormity of compensatory and punitive damage awards being entered and may believe that their punitive damage awards will be reduced by a court.

Some states (Michigan, Nebraska, and Washington, as well as the territory of Puerto Rico) do not permit punitive damage awards. Other states impose punitive damages caps, which may limit the award based on the amount of the compensatory award or as a percentage of the defendant’s net worth. Some states with punitive damage caps have exceptions, such as for product liability or medical malpractice cases.

In State Farm Mut. Automobile Ins. Co. v. Campbell, the U.S. Supreme Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.” However, coupled with the overall rise in verdicts, a single-digit multiplier may still be a significant award. For example, if a jury awarded compensatory damages of $50 million, a single-digit multiplier of 8 would equate to $400 million in punitive damages.

While the insurability of punitive damages depends on the specific policy issued, only five states (California, Colorado, New York, Rhode Island, and Utah) prohibit insuring punitive damages. In the other 45 states, where an insurance policy provides punitive damage coverage, it may be the insurer, not the defendant, who pays a punitive damage award. This raises a question of whether punitive damage awards achieve their stated purpose of punishing misconduct.

The Risks of Jury Trials

The National Center for State Courts periodically surveys local court systems. In 2015, it noted that damage awards in jury trials are at least 48 times greater than bench trials. Cases that warrant the imposition of punitive damages are also the types of cases which are more likely to be tried to a jury, instead of at a bench trial. Punitive damages are awarded in about 8% of contract disputes compared to 3% of tort cases. It’s also worth noting that contract disputes often occur between corporate parties, which have clear documentation of their damages, contributing to higher punitive damages awards.

In a bench trial, only the judge decides the case, which poses certain risks. However, juries are more likely to impose excessive punitive damages awards. Since the risks of a bench trial may be less than the possibility of excessive punitive damages, corporations should consider including and enforcing jury trial waivers in contracts when permissible to do so.

In some instances, punitive damages awards are magnified if a jury finds litigation tactics to be distasteful. Therefore, if a litigated matter is being tried to a jury, it is critical to consider how the jury would perceive the litigation tactics used as part of the overall litigation strategy.

During trial, plaintiffs increasingly use “reptilian tactics,” which appeal to jurors’ emotions by suggesting that when a defendant breaks a rule, society generally (including the jurors) is protected by imposing punitive damages. Defense counsel should file motions to limit the use of reptilian tactics. Defense counsel should also ensure that jury instructions provide adequate guidance regarding the factors relevant to imposing punitive damages. Jurors must understand that they have discretion in awarding punitive damages.

Rising Insurance Premiums

Predictably, the increase in punitive damages awards has been followed by an increase in insurance premiums. Another potential outcome is that insurance policies may increasingly limit or exclude punitive damages. When the financial risk of insuring cannot be offset by premium increases, insurers may stop writing certain types of business or in certain jurisdictions. Corporations undoubtedly pass-on insurance costs to consumers.

Corporations have several options to manage the risk of punitive damages. First, corporations should seek to insure against punitive damages by purchasing: a general liability policy that provides punitive damage coverage; a most favorable jurisdiction or venue endorsement, which provides that the insurer will provide coverage for punitive damages but will also apply the law of jurisdiction that is “most favorable” to the insurability of punitive damages; or a “wrap-around” policy issued by a non-U.S. insurer, who is not subject to state insurance regulations, which will cover punitive damage awards in states where coverage for punitive damages is not permissible.

Once a claim arises, because of the risk posed by punitive damages, corporations should consider placing their entire tower of insurance on notice of a potential claim or pending lawsuit and invite the tower to participate in any settlement discussions.

Corporations, their insurers and their counsel should work together to identify creative opportunities to mitigate punitive damage award risk.  For instance, in a high/low agreement, the plaintiff and defendant agree that, regardless of the jury verdict, the plaintiff will receive no more than the “high” amount and no less than the “low” amount. In jurisdictions where it is permissible, a high-low agreement may limit risk of an excessive verdict.

At a higher level, corporations may wish to consider supporting legislative initiatives that limit punitive damages.  These changes include:

1. Prohibiting consideration of a defendants’ net worth when imposing punitive damages.
2. Prohibiting discussion of punitive damage caps or the amounts that may go to a state government instead of the plaintiffs.
3. Prohibiting the plaintiff from suggesting an amount of punitive damages.
4. Requiring courts to justify why the amount of the award is reasonable, considering both compensatory and punitive damages.
5. Exempting punitive damages from requirements for an appeal bond.