(Article from Insurance Law Alert, June 2016)
For more information, please visit the Insurance Law Alert Resource Center. The California Supreme Court ruled that a post-verdict award of attorneys’ fees in a coverage action should be considered compensatory damages in determining whether a punitive award is unconstitutionally excessive. Nickerson v. Stonebridge Life Ins. Co., 2016 WL 3192499 (Cal. June 9, 2016).
A policyholder sued his health insurer for breach of contract and bad faith based on its failure to pay full benefits for an extended hospital stay. Before trial, the parties stipulated that if the policyholder succeeded, the trial court would determine the amount of attorneys’ fees to which he was entitled under California precedent. See Brandt v. Superior Court, 37 Cal. 3d 813 (Cal. 1985) (when an insurer refuses to pay policy benefits in bad faith, attorneys’ fees reasonably incurred in obtaining benefits are recoverable as an element of compensatory damages). Following trial, the court issued a directed verdict on the policyholder’s breach of contract claim, awarding him $31,500. With respect to the bad faith claim, the jury awarded the policyholder $35,000 for emotional distress and $19 million in punitive damages. After the jury rendered its verdict, the court awarded the policyholder $12,500 in Brandt fees.
The trial court ruled that the punitive damages award was unconstitutionally excessive. In calculating a permissible award, the court considered only the $35,000 compensatory damage award, and not the $12,500 in
Brandt fees. An intermediate appellate court affirmed. The appellate court acknowledged that
Brandt fees are properly considered compensatory damages for purposes of evaluating a punitive-compensatory damage ratio, but held that such fees could not be included in the calculation where, as here, they are awarded after the jury issues a punitive damage award. The California Supreme Court reversed. Finding “no apparent reason” why a court applying the constitutional guidelines may not consider a post-verdict compensatory damage award in its calculus, the court stated that “to exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured’s harm.”