Opinion ID: 1305483
Heading Depth: 1
Heading Rank: 4

Heading: punitive damages and the standard of review

Text: ¶ 44. We now turn to the issue of the punitive damages award. Tower argues that the appellate court erred in upholding a grossly excessive punitive damages award of $3,500,000 in violation of due process constraints. We disagree, and affirm the decision of the court of appeals upholding that award by the jury. [9-11] ¶ 45. Proof of a bad faith claim does not necessarily make the award of punitive damages appropriate. Anderson, 85 Wis. 2d at 697. The intent necessary to maintain an action for bad faith is distinct from what must be shown to recover punitive damages. Id.; see also Wis. Stat. § 895.85 (3). The factors necessary for an award of punitive damages, require a showing of: (1) evil intent deserving of punishment or of something in the nature of special ill-will; or (2) wanton disregard of duty; or (3) gross or outrageous conduct. Anderson, 85 Wis. 2d at 697. [5] [12, 13] ¶ 46. Punitive damages may properly be imposed to further a state's legitimate interests in punishing unlawful conduct and deterring its repetition. BMW, 517 U.S. at 568. According to Wisconsin law, the award of punitive damages in a particular case is within the discretion of the jury, and [w]e are reluctant to set aside an award merely because it is large or we would have awarded less. Jacque v. Steenberg Homes, Inc., 209 Wis. 2d 605, 626, 563 N.W.2d 154 (1997). ¶ 47. In Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001), the United States Supreme Court held that the Ninth Circuit Court of Appeals erred in applying the less demanding abuse-of-discretion standard when reviewing district court determinations of the constitutionality of an award of punitive damages. Instead, the United States Supreme Court determined that the constitutional issue of punitive damages merits de novo review. Cooper, 532 U.S. at 431. In reaching that conclusion, the Court said that the precise meaning of concepts like gross excessiveness is a fluid concept that take their substantive content from the particular context[ ] in which the standard[ ] is being assessed. Id. at 436. The Court went on to say: Independent review is therefore necessary if appellate courts are to maintain control of, and clarify, the legal principles. Again, this is also true of the general criteria set forth in Gore; they will acquire more meaningful content through case-by-case application at the appellate level. Finally, de novo review tends to unify precedent and `stabilize the law.' . . . Justice Breyer made a similar point in his concurring opinion in Gore: Requiring the application of law, rather than a decisionmaker's caprice, does more than simply provide citizens notice of what actions may subject them to punishment; it also helps to assure the uniform treatment of similarly situated persons that is the essence of law itself. Id. [14] ¶ 48. Similarly, in Wisconsin, in Management Computer Services, this court held, in determining whether a jury's award was excessive, that the reviewing court properly reviewed the entire record ab inito or de novo, placing no weight on the circuit court's conclusions. See Management Computer Servs. v. Hawkins, Ash, Baptie & Co., 206 Wis. 2d 158, 192 n.32, 557 N.W.2d 67 (1996). We reached that conclusion because the circuit court set forth conclusory reasons for reducing a jury's punitive damages award of $1,750,000 to $650,000, and failed to analyze the evidence or set forth its own reasons for ordering remittitur with particularity. While Management Computer Services is a case involving remittitur, and therefore factually distinguishable, we nevertheless apply the reasons set forth in Cooper and extend the de novo review rule in Management Computer Services to apply to all situations, remittitur or otherwise, where there is a review of a punitive damages award. Therefore, building upon and extending the rule in Management Computer Services, we hold that a de novo standard of review is appropriate when reviewing a circuit court's determination of the constitutionality of punitive damages awards. ¶ 49. Although de novo review is the appropriate standard of review, we nevertheless acknowledge that the Due Process Clause of the Fourteenth Amendment imposes substantive limits on the size of a punitive damages award. Management Computer Servs., 206 Wis. 2d at 193. See also Cooper, 532 U.S. at 433. [15, 16] ¶ 50. An award is excessive, and therefore violates due process, if it is more than necessary to serve the purposes of punitive damages, or inflicts a penalty or burden on the defendant that is disproportionate to the wrongdoing. Management Computer Servs., 206 Wis. 2d at 193 (citing Tucker v. Marcus, 142 Wis. 2d 425, 446, 418 N.W.2d 818 (1988); Wangen v. Ford Motor Co., 97 Wis. 2d 260, 303, 294 N.W.2d 437 (1980); Fahrenberg v. Tengle, 96 Wis. 2d 211, 234, 291 N.W.2d 516 (1980)). As noted by this court in previous decisions, the purpose of punitive damages is to punish the wrongdoer, and to deter the wrongdoer and others from similar conduct, rather than to compensate the plaintiff for any loss. Id. (citing Wangen, 97 Wis. 2d at 303; Malco v. Midwest Aluminum Sales, Inc., 14 Wis. 2d 57, 64, 109 N.W.2d 516 (1961)). See also Cooper at 432 (citing Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974)). [17] ¶ 51. In Jacque, we reiterated the decision of the United States Supreme Court in TXO, and held that only when an award can be fairly categorized as grossly excessive, in relation to the state's interests in punishment and deterrence, does it enter the zone of arbitrariness that violates due process. Jacque, 209 Wis. 2d at 627 (citing TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443, 454 (1993)). Furthermore, the test for grossly excessive[ness] stems from a basic notion of fairness that a party should receive fair notice, not only of the conduct that will subject it to punishment, but also of the severity of the penalty that a state may impose. BMW, 517 U.S. at 574; Jacque, 209 Wis. 2d at 627. ¶ 52. Accordingly, in determining whether an award of punitive damages is excessive, the United States Supreme Court has applied a three-part test. The test asks the reviewing court to weigh: (1) the degree of egregiousness or reprehensibility of the conduct; (2) the disparity between the harm or the potential harm suffered and the punitive damages award; and (3) the difference between the punitive damages and the possible civil or criminal penalties imposed for the conduct. BMW, 517 U.S. at 575; State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S.___, 123 S. Ct. 1513 (2003). [6] ¶ 53. When applying a virtually identical test, Wisconsin courts have been encouraged to consider, from the following, those factors which are most relevant to the case, in order to determine whether a punitive damages award is excessive: 1. The grievousness of the acts; 2. The degree of malicious intent; 3. Whether the award bears a reasonable relationship to the award of compensatory damages; 4. The potential damage that might have been caused by the acts; 5. The ratio of the award to civil or criminal penalties that could be imposed for comparable misconduct, and 6. The wealth of the wrongdoer. Management Computer Servs., 206 Wis. 2d at 194 (citing BMW, 116 S. Ct. at 1598-1600; Tucker, 142 Wis. 2d at 446-47; Brown v. Maxey, 124 Wis. 2d 426, 439, 369 N.W.2d 677 (1985); Wangen, 97 Wis. 2d at 302; Dalton v. Meister, 52 Wis. 2d 173, 180-81, 188 N.W.2d 494 (1971), cert. denied, 405 U.S. 934 (1972); Malco, 14 Wis. 2d at 66). ¶ 54. With the above rules in mind, we now turn to the facts of this case. As an insurance company doing business in Wisconsin, Tower has an implied duty of good faith and fair dealing, and our law has developed such that this duty encompasses the obligation to investigate properly and evaluate reasonably disputed coverage claims. Prosser v. Leuck, 225 Wis. 2d 126, 138, 592 N.W.2d 178 (1999). Here, the state has a legitimate interest in deterring insurance companies such as Tower from engaging in acts of bad faith. Furthermore, the state has an interest in deterring Tower, and others, from ignoring applicable decisions of this court as to its duty to its insured, and then later claiming ignorance of what such a duty entails. The $3,500,000 punitive damages award against Tower will serve the legitimate state interest in deterrence, as well as in punishment. Consequently, the punitive damages award will send a message not only to Tower, but to other insurance companies as well, that ignoring its duties as an insurer is not acceptable and might very well result in substantial punitive damages. ¶ 55. Since we have determined that the punitive damages award accomplishes the legitimate state interests of punishment and deterrence, we now weigh the factors set forth in BMW against these interests. See Jacque, 209 Wis. 2d at 627. [18] ¶ 56. However, the evidence must be viewed in the light most favorable to the plaintiff, and a jury's punitive damages award will not be disturbed, unless the verdict is so clearly excessive as to indicate passion and prejudice. Id. at 626-27. [19] ¶ 57. First, we analyze the degree of grievousness or reprehensibility involved. As we declared in Jacque, [t]he most important indicium of the reasonableness of a punitive damage award is the degree of reprehensibility of the defendant's conduct. Jacque, 209 Wis. 2d at 628; see also BMW 517 U.S. at 576 n.23 (citing David G. Owen, A Punitive Damages Overview: Functions, Problems and Reform, 39 Vill. L. Rev. 363, 387 (1994)) (The flagrancy of the misconduct is thought to be the primary consideration in determining the amount of punitive damages.) Id. The grievousness or reprehensibility of Tower's conduct is clear from the record. Tower engaged in prohibited conduct while knowing or recklessly disregarding the lack of a reasonable basis for denying the claim. This court told Tower more than 30 years ago about the duty of an insurer to reform an insurance policy upon a discovery of mutual mistake. See Trible v. Tower Ins. Co., 43 Wis. 2d 172, 168 N.W.2d 148 (1969). Not only was Tower told what to do in such a situation of mutual mistake, but Tower was reminded of this decision by Jim Reynolds in his letter. ¶ 58. Recently, the United States Supreme Court reiterated the rules for punitive damages with regard to repeat offenders, or recidivist[s]. Campbell, 538 U.S. at. The United States Supreme Court said: Although [o]ur holdings that a recidivist may be punished more severely than a first offender recognize that repeated misconduct is more reprehensible than an individual instance of malfeasance, Gore, supra, at 577, in the context of civil actions courts must ensure the conduct in question replicates the prior transgressions. TXO, 509 U.S. at 462 n. 28 (noting that courts should look to `the existence and frequency of similar past conduct') (quoting Haslip, 499 U.S. at 21-2). Id. ¶ 59. Tower disregarded the law and its duty to an insured like Trinity not oncebut twice. Such repeated disregard for the law and its duty indeed seems egregious and reprehensible. See BMW, 517 U.S. at 576-77; Jacque, 209 Wis. 2d at 628. In viewing the evidence according to the rules set forth in Jacque and Campbell, the bad faith in this case involved Tower's intentional disregard of its duty to investigate diligently to ascertain and evaluate the facts and circumstances underlying the issuance of the policy and the accident, in order to arrive at a good faith decision. See Prosser, 225 Wis. 2d at 138. ¶ 60. As stated previously, Gallagher, as the representative of Tower, made a series of decisions that illustrate bad faith on behalf of Tower. These acts of bad faith also buttress a determination of the egregiousness of Tower's conduct. The record indicates that Tower, through its prior involvement as the defendant in the Trible case, should have understood its obligation to provide coverage to Trinity where clearly a mutual mistake had occurred. As noted in Campbell, recidivists, or repeat offenders, may be punished more severely, in that their conduct is viewed to be more reprehensible than an individual instance of malfeasance. Campbell, 538 U.S. at. ¶ 61. Trinity lacked coverage due to a mutual mistake attributable to Tower's agent, Rodrian. The court of appeals recognized this. See Trinity, 251 Wis. 2d 212. Furthermore, it is undisputed, and recognized by the court of appeals and the circuit court, that Tower, through Gallagher, knew of this mutual mistake when it denied coverage to Trinity. See id., ¶ 9 (citing to letter to Blackwell). There is no dispute that Trinity requested backdated coverage. See id. ¶ 62. In addition to the undisputed material facts, it is important to note that the record indicates that Gallagher, on behalf of Tower, made the decision to deny coverage without investigating Rodrian's requests for backdating, and without seeking available in-house legal counsel. Not only did Gallagher, on behalf of Tower, fail to investigate the situation properly, but the record reveals that Gallagher failed to contact Fischer, Tower's own underwriter, with whom Rodrian worked on the Trinity policy, about whether he understood Trinity to have requested hired and non-owned coverage. Furthermore, Tower decided to ask for summary judgment without informing the court of the dispute regarding Rodrian's error, and the request for backdating. These decisions, acts, and omissions on the part of Gallagher, on behalf of Tower, illustrate a continuing, egregious, and flagrant pattern of disregard toward Tower's duty owed to its insured, Trinity. As a result, we conclude that the egregiousness and reprehensibility factor has been met under the BMW test. [20-22] ¶ 63. Next, we measure the disparity between the harm or potential harm suffered by Trinity and the punitive damages award. Jacque, 209 Wis. 2d at 628-29. When compensatory damages are awarded, the reviewing court is to consider whether the award bears a reasonable relationship to the award of compensatory damages, and to possible civil or criminal penalties. Id. at 629. Compensatory damages represent the actual harm inflicted on the plaintiff. Id. Wisconsin law expressly rejects the use of a fixed multiplier, either a fixed ratio of compensatory to punitive damages or of civil or criminal penalties to punitive damages, to calculate the amount of reasonable punitive damages. Management Computer Servs., 206 Wis. 2d at 194. Accord Cooper, 532 U.S. at 434, and BMW, 517 U.S. at 582. However, we have held that in the appropriate case, a comparison of the compensatory damages and the punitive damages award is important. Jacque, 209 Wis. 2d at 629. [7] ¶ 64. With regard to the second guidepost, the disparity of harm or potential harm and the punitive damages award, the United States Supreme Court recently held: Nonetheless, because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those we have previously upheld may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages. Ibid., see also ibid. (positing that a higher ratio might be necessary where the injury is hard to detect or the monetary value of noneconomic harm might have been difficult to determine). The converse is also true, however. When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. The precise award in any case, of course, must be based upon the facts and circumstances of the defendant's conduct and the harm to the plaintiff. Campbell, 538 U.S. at ___. ¶ 65. The facts and circumstances of Tower's conduct and Trinity's harm are clear. At trial, both parties were given the opportunity to introduce evidence and argue on this issue. Tower introduced evidence that the only potential damage in this case was $17,000; Trinity introduced evidence of a harm of $490,000 had Tower succeeded on its motion for summary judgment. The punitive damages award represents a 7:1 ratio of punitive damages to compensatory damages, if Trinity's position is applied. ¶ 66. Finally, under the BMW test, we engage in a comparison of the punitive damages award and the civil or criminal penalties that could be imposed for comparable misconduct. Jacque, 209 Wis. 2d at 630. As noted by the United States Supreme Court: The third guidepost in Gore is the disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases. We note that, in the past, we have also looked to criminal penalties that could be imposed. The existence of a criminal penalty does have bearing on the seriousness with which a State views the wrongful action. When used to determine the dollar amount of the award, however, the criminal penalty has less utility. Campbell, 538 U.S. at ___. ¶ 67. The court of appeals found this factor largely irrelevant to the case at hand. See id. In reaching that conclusion, the court of appeals said that: [t]he legislature has not put into place a criminal or civil statute prohibiting insurance carriers from intentionally disregarding the contractual rights of an insured and rejecting claims on the basis of their own economic self-interest. Thus, as our supreme court held in Jacque, when a legislature has not prescribed penalties for the type of conduct engaged in by the defendant, this third guidepost becomes immaterial. Trinity Evangelical Lutheran Church v. Tower Ins. Co., 2002 WI App 46, ¶ 41, 251 Wis. 2d 212, 641 N.W.2d 504. ¶ 68. However, the legislature has provided a criminal penalty, including a fine of up to $10,000, for any violation of any insurance statute or rule of this state. Wis. Stat. § 601.64(4). The Wisconsin Administrative Code contains insurance rules that prohibit unfair settlement practices, including the [f]ailure to attempt in good faith to effectuate fair and equitable settlement of claims submitted in which liability has become reasonably clear. Wis. Admin. Code § Ins. 6.11 (3)(a)(4) (Jan., 2002). In this case, as noted previously, a 7:1 ratio results if Trinity's position on compensatory damages is accepted. Furthermore, as noted above, a criminal penalty has less utility when used to determine the dollar amount of the punitive damages award. Campbell, 538 U.S. at ___. [23] ¶ 69. The factors discussed are the ones most relevant in this case. As noted previously, there are other factors that may be relevant given the nature of the case at hand. See Management Computer Servs., 206 Wis. 2d at 194. Defendant's wealth is oftentimes a significant factor. In this case, the evidence presented to the jury through the testimony of Trinity's expert, Robert Niendorf, appears sufficient to justify the size of the punitive damages award. [8]