BENCH BLOG: Punitive damage case shows bias for insurance co.

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The Wisconsin Supreme Court used a numerical ratio to reduce what it considered to be an unconstitutionally excessive punitive damages award.

In a case involving a lakeshore lot in Door County, First American Title Insurance Co, the party being punished with punitive damages, had provided the lot’s owner, the Kimbles, with a title insurance policy having a $370,000 limit.

As is typical, the policy obligated First American to defend and indemnify the Kimbles for any covered loss resulting from non-marketability of the title as well as lack of right of access to and from the land.

When the Kimbles purchased the property in 2004, it was benefitted by two easements allowing access to a highway. Both easements were on abutting property owned by Land Concepts Inc.

But when the Kimbles put the property on the market in 2008, Land Concepts gave them notice that they did not have title to the two easements and therefore could not convey them when selling the property.

The Kimbles notified First American of the dispute. First American knew that the deeds to both easements were defective. While revealing that one deed was defective, First American affirmatively deceived the Kimbles by repeatedly reassuring them that the second easement’s deed provided good access to the highway.

The dispute with Land Concepts continued and resulted in the Kimbles losing a $1.3 million cash offer for the lot because the offer had been contingent on resolution of the access issue.

Lower court proceedings

The Kimbles filed suit in 2009 against Land Concepts, two sets of the lot’s prior owners, and First American. Door County Circuit Judge Todd Ehlers presided over Kimble v. Land Concepts Inc.

Prior to trial, the Kimbles settled their claims with all defendants except First American.

One set of prior owners, the Stevensons, owned property to the north of the Kimbles’ lot. They and the Kimbles bought a new easement for $40,000.

In addition, the Stevensons paid the Kimbles for assignment of their rights against First American. The Stevensons then cross-claimed against it for breach of contract, breach of fiduciary duty and bad faith because of its refusal to defend the title to the Kimbles’ lot.

The case was tried to a jury. The jury returned a verdict in favor of the Stevensons, awarding $50,000 in compensatory damages on the breach of contract claim and $1 million in punitive damages to punish First American’s bad faith.

Post-verdict Ehlers reduced the compensatory damages to $29,738.49 and then entered judgment for $1,029,738.49. The court of appeals affirmed in an unpublished decision written by Judge Gary Sherman.

Supreme Court opinion

The sole issue on appeal to the Supreme Court was whether the punitive damages award was excessive. The court issued a 4-2 split decision with the majority opinion written by Justice Annette Ziegler and a dissent written by Chief Justice Shirley Abrahamson. (Justice David Prosser did not participate.)

Ziegler cited Trinity Evangelical Lutheran Church & Sch.-Freistadt v. Tower Ins. Co. as the leading case establishing that an appellate court reviews a punitive damage award de novo in determining whether the award amount is consonant with substantive due process. Due process is violated if the amount of the award is more than is necessary to meet the purpose of punitive damages, or if it inflicts a penalty disproportionate to the wrongdoing.

The majority first determined that although First American’s bad faith conduct was reprehensible, it was not egregious, because it was an isolated incident. It said there was no evidence of malicious intent.

It next analyzed whether there was a reasonable relationship between compensatory and punitive damages. This is determined in part by the harm from the defendant’s conduct.

The majority rejected as speculative the argument that the harm was the loss of the $1.3 million sale price of the property. Instead the majority added the $40,000 cost of the new easement to the $29,738.49 figure as the correct compensatory damage award.

Although Trinity eschewed a fixed ratio or multiplier, the court noted the 14:1 ratio of punitive to compensatory damages in the jury’s verdict, and observed that there were no special circumstances in the case justifying a high ratio.

Then without specifying why, the majority concluded that the “appropriate amount” of punitive damages was $210,000 resulting in a 3:1 ratio, below the 4:1 ratio described by U.S. Supreme Court as “close to the line” of violating due process. The case was then remanded to have Ehlers enter judgment for $239,738.49.

The dissent

Abrahamson accused the majority of having reached a “shocking result.” First American “is enriched by its wrongdoing” in that its bad faith actions cost less than the policy limits it would have paid to defend the Kimbles’ title.

She noted that the majority actually used the reasoning in the Trinity dissent, not the Trinity court’s main opinion, to analyze the matter. There are six factors in the Trinity opinion, not the three used by the majority.

Not least is the grievousness of the acts. The dissent argued that all of First American’s acts were done in bad faith, and there were multiple acts, including repeated false assurances to its insured. Thus, the acts constituted a “continuing, egregious, and flagrant pattern of misconduct.”

In addition, the dissent found sufficient factual support in the record that the harm was in fact the $1.3 million loss of sale of the property due to the non-marketability of its title. It also noted that the majority’s 3:1 ratio was arrived at “for no ostensible reason.”

Lastly, had the majority applied the six Trinity factors, it would have analyzed the wealth of the wrongdoer, a key consideration because it affects deterrence. The record in this case is that First American could “easily” have paid the $1 million the jury awarded based on its 2010 net profit of $65 million.

Commentary

The justices comprising the majority cost themselves respect when they cite a landmark case as controlling, and then don’t follow its analytic framework. The dissent here is correct to have based its analysis on all six factors in the Trinity opinion, including the traditional wealth factor of the wrongdoer.

It is interesting to juxtapose cases with ambiguous insurance policies to this case of explicit insurer bad faith. With ambiguous policy terms, a tie goes to the insured; in this bad faith case, a tie went to the insurer with an 80 percent reduction in the damage award.

It is hard to read this case in any other way than pro-insurance companies.