Possible punitives insufficient for diversity jurisdiction

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The Seventh Circuit held on Dec. 27 that a bad faith action against an insurer in which the total damages plus attorney fees are under $7,500 does not meet the amount in controversy requirement to satisfy the diversity jurisdiction in federal court, even if punitive damages may be awarded.

From March 1999 through March 2002, Claudette Munro incurred medical bills in connection with a series of hospital visits. Golden Rule Insurance Company paid $289,651 of these bills but contested inpatient expenses totaling $3,885, arguing that they were not covered under the terms of the policy.

Munro filed an action against Golden Rule in Wisconsin state court to compel payment, alleging bad-faith breach of contract. Golden Rule removed the case to federal court, citing diversity of citizenship.

While the case was pending, Golden Rule resolved the billing dispute and paid the outstanding charges of $3,885. Munro then dismissed the breach of contract claim, but continued to press the claim of bad faith.

Magistrate Judge Patricia J. Gorence granted summary judgment in favor of Golden Rule, and Munro appealed. In a decision by Judge William J. Bauer, the Seventh Circuit vacated the judgment, and remanded the case with instructions to dismiss for lack of diversity jurisdiction.

The court found that, even with the potential of punitive damages, the amount in controversy could not exceed the minimum $75,000, required by sec. 28 U.S.C. 1332.

Munro certified in a supplemental brief that $3,330 in attorney fees had accrued by that point, which combined with the original amount in dispute, added up to $7,215.

Both the plaintiff and defendant asserted that the possibility of a substantial award of punitive damages was sufficient to satisfy jurisdictional requirements, but the court disagreed.

The court concluded, "Even if we were to accept as accurate the parties’ total compensatory damages figure of $7,215.01, the punitive damages award would need to be more than ten times that amount to meet the statutory threshold. The Supreme Court, however, has set constitutional limits on the punitive damages multiplier in simple economic-loss cases, such as nonpayment of insurance. State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 410 (2003) (noting, ‘few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process’). Neither party addresses this presumption against punitive damages that are a double-digit multiple of the compensatory injury."

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Golden Rule cited Mathias v. Accor Lodging, Inc., 347 F.3d 672 (7th Cir. 2003), for the proposition that an award of punitive damages can exceed a single-digit multiplier of actual losses. The court rejected the application, however, reasoning, "Golden Rule misinterprets that decision. Mathias holds that punitive damages may be a large multiple of any one victim’s loss when a defendant’s acts inflict small losses on hundreds of people. Here, there was no widespread injury (cite omitted)."

The court added, "In fact, there does not appear even to have been individual injury. Since the Munros never paid the contested bill, their actual damages were not $3,885.01, but zero. Neither side cites a decision for the proposition that Wisconsin state law authorizes punitive damages when the insurer delays in payment and the insured suffers no loss. Even when attorney fees are taken into account, the Munros are $71,670.00 short of the threshold for federal jurisdiction. To find that subject matter jurisdiction exists would render meaningless the amount-in-controversy rule."

Accordingly, the court vacated the judgment, and remanded the case with instructions to dismiss for lack of subject matter jurisdiction.

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David Ziemer can be reached by email.