Oregon Supreme Court Limits
Punitive Damage Awards for
Insurer Bad Faith
Breaking Developments In London Market Law
03/24/08
On 6 March 2008, the Oregon Supreme Court rendered its decision in Goddard v. Farmers Ins.
Co. of Oregon , holding that any punitive damage award for an insurer’s bad faith failure to
settle a third-party claim within policy limits must ordinarily be limited to four times the amount
of compensatory damages. Under the “due process” clause of the United States Constitution,
“excessive” punitive damages are prohibited. However, courts have generally held that the
determination of “excessiveness” is case-specific and hinges on several non-quantifiable factors.
The Goddard case, therefore, represents a potentially significant step towards greater
predictability for insurers’ punitive damages exposure.
What were the facts?
In 1987, the insured was driving under the influence of alcohol and caused a motor vehicle
accident that killed Marc Goddard. Margie Goddard, Marc’s mother, brought a wrongful death
action against the insured as the Personal Representative of Marc’s estate. (To avoid confusion,
Margie Goddard will henceforth be referred to as “Goddard.”) Farmers Insurance Company of
Oregon (“Farmers”) defended the insured under a reservation of rights. (A subsequent
declaratory judgment action established that only one of two potentially implicated policies –
each with $100,000 limits – provided coverage.) Farmers had little doubt about the insured’s
liability. Indeed, the insured was convicted of criminally negligent homicide in June 1988.
Several attorneys representing the insured requested that Farmers settle the case. Farmers,
however, failed to respond to at least one settlement offer from Goddard.
For several years, including the first day of the 1990 wrongful death trial, Farmers’ only
settlement offer was $30,000. That evening, Farmers offered $50,000, with an option to arbitrate
damages up to policy limits as determined in the pending declaratory judgment action. Goddard
then demanded $100,000 (policy limits), plus another automatic $100,000 (policy limits) if the
declaratory judgment established coverage under the second policy. On the third day of trial,
Farmers offered $100,000, with an agreement for further arbitration if the pending declaratory
judgment action established coverage under the second policy. Goddard refused, and the case
was submitted to the jury.
The jury returned a verdict totaling $863,000. The insured assigned to Goddard all of his
potential claims against Farmers, and Goddard sued Farmers. She alleged that Farmers breached
its duty to make reasonable attempts to settle the wrongful death action within policy limits, and
sought $863,000 in compensatory damages and $450 million in punitive damages. Oregon law
provides for extra-contractual damages against insurers only in certain, limited situations.* One
such situation occurs after an insurer undertakes to defend its insured but breaches its “duty to
make reasonable efforts to settle claims in order to avoid exposing the insured to liability in
excess of policy limits.” Goddard presented evidence of Farmers’ “stonewalling” and “lowballing” settlement tactics, arguing that these tactics jeopardized the interests of the insured.
At trial on Goddard’s bad faith claim, the jury awarded $863,000 in compensatory damages and
$21.7 million in punitive damages. After adjustments for interest and a prior payment by
Farmers, the ratio between punitive and compensatory damages stood at 16:1. The Oregon Court
of Appeals reduced the punitive-compensatory damages award to a 3:1 ratio, and Goddard
appealed to the Oregon Supreme Court.
What did the Court hold?
The Oregon Supreme Court agreed with the plaintiff that a slightly higher ratio of punitive to
compensatory damages would be constitutional, but in doing so provided more concrete
guidance for litigants and trial courts than was previously available.
Under the U.S. Constitution, the highest allowable amount of punitive damages in a given case is
governed by three basic “guideposts”: (1) “the degree of reprehensibility of the defendant’s
conduct”; (2) “the disparity between the actual or potential harm suffered by the plaintiff and the
punitive damages award”; and (3) “the difference between the punitive damages awarded by the
jury and the civil penalties authorized or imposed in similar cases.” These factors are qualitative,
not quantitative, and courts have been reluctant to lay down general rules. As a result,
calculating an insurer’s exposure to punitive damages once a bad faith claim had been filed was
a speculative endeavor.
However, the Oregon Supreme Court noted that the second guidepost – the ratio between
compensatory and punitive damages – provides at least some concrete guidance. It also noted
that “reprehensibility” is generally adjudged to be lower where the harm caused is economic, as
in most bad faith cases, rather than physical in nature. Thus, the Court held “as a very general
rule of thumb,” that a 4:1 ratio between punitive and compensatory damages marks the outer
constitutional limits where an insurer’s bad faith, as it usually does, causes solely economic
harm.
How does the Goddard case affect London Market Insurers?
The Goddard case does not change the substantive law of bad faith in Oregon. The 4:1 ratio
approved by the Oregon Supreme Court is substantially lower than previous ratios, ranging into
the high single digits, suggested by the U.S. Supreme Court. Although other factors may justify a
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different ration, the relative certainty provided by the Goddard Court’s 4:1 ratio will assist
London Market Insurers in assessing their exposure once a bad faith claim has been filed.
However, the jurisprudence of the constitutional limits on punitive damages may soon change
yet again. The United States Supreme Court is currently considering the constitutionality of the
$2.5 billion punitive damage award assessed against Exxon for the 1989 Exxon Valdez oil spill
disaster. The Court heard arguments in that case on February 27, and a ruling will be issued in
the coming months.
* If you wish to discuss the potential bases for exposure to punitive damages for bad faith under
Oregon law, please contact Stephen McCarthy via e-mail (mccarthys@lanepowell.com) or
telephone, 011-503-778-2100, to arrange a mutually convenient time.
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