Defenses:
- The Plaintiff’s Fault
o Contributory Negligence
o Comparative Negligence*
- Assumption of Risk
o Express Agreements
 Hanks v. Powder Ridge Restaurant Corp.
 Express exculpatory agreements that violate public policy are
unenforceable.
o Implied Assumption of Risk
 Primary
 Secondary
 Murphy v. Steeplechase Amusement Co.
 Primary
 One who voluntarily participates in a sport accepts the inherent
dangers in it so far as they are obvious and necessary to
participation.
 Davenport v. Cotton Hope Plantation Horizontal Property Regime (S.C.
1998)
 Secondary implied assumption of risk is merged with comparative
negligence.
 Assumption of risk is not an absolute bar to recovery unless the
plaintiff's degree of fault in assuming the risk is greater than the
defendant's negligence.
 Express assumption of risk and primary implied assumption of risk
continue to exist and when applicable completely bar recovery.
 Un
 Notes on Davenport
o Assumption of risk and contributory negligence
o Primary still exists because it is focused on the
o What is the difference between unreasonable and
reasonable implied secondary assumption of the risk
 Unreasonable: risk is out of all proportion to the
advantage P is seeking to gain (B < PL, given
perfect information)
 Negligence counts as fault
 Reasonable: P’s action is knowingly encountering a
risk created by D is reasonable when weighted
against the risk of injury ( B> PL, given perfect
information)


Does not count as fault because it isn't
negligent
o How does the jury compare:
 D’s negligence in allowing floodlight to remain
broken; and
 P’s negligence in using darkened stairway?
 Wassell v Adams (1989)
o Requires a formless, unguided
inquiry
o This is the problem with comparative
negligence
 E.g.
o Either precaution would avoid injury
o Incremental cost of fixing the light:
10
o Incremental cost of using other
stairs: 20
o Inverse ration: 20/10
o D: 66.7%; P: 33.3%
Firefighter’s Rule
 A public safety officer in the performance of her duties cannot
recover damages for injuries she sustains as a result of a person’s
negligence that necessitates her performance
o Why?
 Licensee: firefighter takes property as he finds it
 Assumption of the risk:
 Double taxation
 Public policy against awarding damages to
firefighters for hazards that create need for
their services and for which they are
compensated from taxes
 Worker’s compensation: professional rescuers are
provided with worker’s compensation, and worker’s
compensation insurance is provided indirectly by
taxpayers
 Pre-presentment negligence: A professional who is
engaged to provide a service necessitated by clients
or patients negligence may not
 33 adopted the rule
 Courts have adopted different forms
o Some allow for recovery for willful and wanton conduct
(like arson)


o Some allow to recover from injuries resulting from an act
of negligence unrelated to the reason the officer is
responding
In at least one state, officer may not sure at all
R3d
o Eliminates “licensee” rationale for the firefighter rule
o Takes no other position
- Preemption
o Article 6 of the Constitution
 Constitution is supreme law of the land (supremacy clause)
o Overarching consideration: intent of congress.
 Did congress, acting within its constitutional power, intend to preempt
state law?
 Intent to preempt can be:
 Expressed, or
 Implied
o Express Preemption
 Preemptive effect of statute depends on the precise terms of the federal
statute in relation to the relevant state law
o Implied Preemption
 Field: scope of statute indicates that congress intended federal law to
occupy a field exclusively; or
 Conflict: State law is in actual conflict with federal law
 Impossibility: impossible for a person to comply with both state
and federal requirements
 Obstacle: statute presents an obstacle to intentions of congress
 Medtronic, Inc v. Lohr (1996)
 D’s pacemaker obtained FDA approval based on “substantial
equivalency” in a Sec. 510(k) process, not premarket review
 To invoke express preemption
o D must satisfy:
 State or local law must establish requirement
 State requirement must be related to but different
from or in addition to a federal mandate
 Federal mandate must be be a requirement
 Federal requirement must be applicable to the
device at issue
 Result:
o Tort actions are not preempted
 Holding:
o Preemption under the Medical Device Amendments is
limited to state and local requirements specific to a device
that are different from or in addition to federal
requirements that are specific to that same device.
 Riegel v. Medtronic, Inc (2008)
 State tort law can be preempted by a federal regulation that
prohibits a state from establishing safety “requirements” different
from federal requirements.
 Can't bring state tort law challenges to the safety or effectiveness
of devices that have received FDA pre-market approval
 Rationale:
o Specific device
o State's common law duties are “requirements”
 Kurns v. Railroad Friction Prods
 Field preemption case
 Under Napier, the LIA preempts the field
 Buckman Co. V Plaintiff’s Legal Committee
 Conflict Preemption: Obstacle
 Holding:
o State fort law action based on theory of fraud on the FDA
conflicts with and is therefore impliedly preempted
o Implied Preemption?
 Wyeth v. Levine (2009)
 Phenergan administration issues leading to amputation
 When the case got to the supreme court it dropped the field preemption claim and asserted conflict preemption, in that
o Impossibility – impossible for it to comply with state
without violating federal law
o Obstacle – obstacle to accomplishment
 State tort-law products-liability claims for failure to warn are not
preempted by federal law.
 Merck Sharp & Dohme Corp. V. Albrecht (2019)
 Impossibility preemption must be decided by a judge, not a jury
 If you want preemption – you have to show that you went to the
FDA to make the changes to the warning labels
 Geier v. Am. Honda Motor Co. (2000)
 Seatbelts case
 Saving clause: “compliance with a federal safety standard does not
exempt any person from any liability

o ERISA Preemption

- Statutes of Limitation
o Encourage more accurate resolution by avoiding faded memory and stale facts
o Provide repose for those who might be sued
o Clock starts on accrual of injury
 Actions “accrues” when all elements of claim are satisfied
 Usually action “accrues” when P suffers injury from prior or
contemporaneous negligence
o Statute of Repose:
 Begins to run when some specific event usually pertaining to D’s conduct
takes place
 E.g. event might be D parting with control of product
 Like bankruptcy – can provide a fresh start or freedom from
liability
o If a state has both, a CoA can be extinguished before the statute of limitations
runs out by a statute of repose
o CTS Corp. V. Waldburger
 Statute of limitations cannot begin to run before discovery date
 State of repose unaffected
Damages and Insurance:
- Damages
 Outline:
o Compensatory
 Pecuniary Loss
 Past (relative to time of judgement)
o Lost earnings
o Medical expenses
o Value of lost household
contributions
 Future
o Lost earning capacity
o Medical expenses
o Economic value of household

contributions
 Non-Pecuniary Loss
 Pain & Suffering (past and future)
 (Hedonic)
o Loss of the enjoyment of life
o Punitive
Lost Earning Capacity (messy)


(1) Construct wage profile on current conditions
(2) For each future year, make adjustments to reflect expected
changes over time
 (4) Calculate present value of each future annual adjusted income
o Present Value of $1
 1/(1+r)^n
 (5) Sum present values of each future adjusted income amount
 PA adheres to a “total offset” rule
o Future earnings are increased to take into account
individual and economy wide productivity increases
o No increase in future earnings is made to account for
inflation
o No discounting is made to present value
o (PA and Alaska)
 Legal impediments to employment
 Courts have struggled with whether an illegal alien is entitled to
recover for lost earning
o Single Judgement Rule
o Compensatory Damages
 For physical injury and not pure emotional harm are not taxable.
 Seffert v. Los Angeles Transit Lines (1961) (Non-Pecuniary Damages)
 Serious bus accident case from getting shut in the bus drawer and
dragged
 Trial awards $188,000
 D claims the award is excessive
 Rule:
o An appellate court may only interfere with the amount of a
damages award where it shocks the conscience and
indicates passion, prejudice, or corruption on the part of the
jurors.
 Class Notes:
o Should non-pecuniary damages be recoverable?
 Pro:
 If not, then we under deter, which would
result in more tortious behavior
 Against:
 Because we have no way to easily calculate
the costs involved, we should not award
non-pecuniary damages
 Factoring in the higher administrative costs
o For what exact losses should an award of nonpecuniary
damages compensate?
o
o
o
o
 Physical pain?
 Emotional distress about the future?
 Embarrassment over physical condition?
What would proper Jury Instructions be?
 PA
 Fairly and adequately compensated for
o physical pain, mental anguish,
o discomfort, inconvenience, and
distress
o As well as embarrassment
o As well as disfigurement
 Must consider several factors
 Jury decides $$
 Mich.
 Reasonably, fairly, and adequately
compensates for:
 Based on evidence and not speculation
 Cannot be proved in a specific dollar
amount but;
 Jury decides $$
What is the standard of appellate review?
 Seffert: award “shocks the conscience and
necessarily implies that the verdict must have been
the result of passion and prejudice”
 NY Statute: award “deviates materially from what
would be reasonable compensation”
 Standard interpreted to be less deferential to
the jury than is “shocks the conscience”
standard
Per diem?
 Seffert dissent: Per diem methodology “multiplies
the hazards of conjecture”
 Seems mathematical but it is really just conjecture
 Some states prohibit this
 Some states allow it
Risk Analysis?
 Suppose jury concludes that reasonable person (or
P) would demand $10, 000 to incur 10% risk of the
pain and suffering P endured
 Is pain and suffering worth $100,000
 Pain and suffering / probability of it
happening do NOT have a linear, but an
exponential relationship
o Compare this to awards in similar cases
 Middle range (25%-75%) has “presumptive
validity”
 Extreme or unexplained outlier?
o Remittur and Additur
 Remittur:
 judge offers the P a choice of recovery less
than the jury award or a new trial
 Additur:
 Judge offers D the choice of a judgement
greater than the jury award or a new trial
 Less frequent in state court
 Generally unavailable, deemed
unconstitutional, in federal court
 Federal appellate courts routinely make such
comparisons in reviewing pain and suffering awards
 Some states prohibit consideration of comparable
pain and suffering awards at both appellate and trial
stages
 Cuevas v. Wentworth Group
 Comparison of supposedly similar verdicts
to assess whether a particular damages
award is excessive is ultimately a futile
exercise that should be abandoned
 Posner: Justzi-Johnson
 Absolutely no standard
o Perez
 Extreme brain injury
 Jury Awarded:
 10,500,000 for past
 75,250,000 for future (43 years)
 Trial judge directed new trial unless P agreed to
reduce award for future pain and suffering to
$30,1000,000
 Appellate Division:
 $40.6 million????
 App Div ordered remittur to 5,000,000 past
and 15,000,000 future
 Declined to announce a new rule prohibiting the
practice of anchoring
o Anchoring Bias is the tendency to give excessive weight to
the starting value based on the first received information or
one’s initial judgement, and not to modify this anchor
sufficiently in light of later information
 Estimate of the product of 9x8x7x6x5x4x3x2x1 are
higher on average than the estimated product of
1x2x3x4x5x6x7x8x9.
 Anchoring has a strong effect in awarding
nonpecuniary damages
o Awards for future pain and suffering are generally not
discounted to present value (though some courts discount)
 Is refusal to discount sensible?
 If we are not certain about the number, then
it becomes an unnecessary administrative
cost to discount
 Some states impose statutory caps on awards for
non-pecuniary damages
 Some states have caps on total rewards.
 Arguments against the capping
 You are not giving people their damages if
you set caps?
o Contingency Fees
 P’s counsel typically represents P on a contingency
basis, with P agreeing to provide services (usually
1/3 of the award) for a portion of the award.
 What is the purpose of contingency fees?
 A way to finance the litigation
 Designed to align the interests of the lawyer
with the interests of the client
 Should the government regulate the size?
 Example: no more than 25%?
 McDougald v. Garber (1989) (Hedonic Damages)
 Mom goes into C-Section and never wakes up due to coma
 Rule:
o Some degree of cognitive awareness of loss by the plaintiff
is a prerequisite to recovery for loss of enjoyment of life.
 A person needs to be aware of the loss in order to
recover for loss of enjoyment in life.
 Hedonic damages claim as well as a LOL claim
 Trial Court: Have to have awareness to recover for pain and
suffering BUT can recover for LOL even if incapable of
experiencing pain and suffering
 Ultimate Holding:



o Loss of enjoyment of life is an element of pain and
suffering, not a separate category of damages
o P must have some level of awareness to recover damages
for pain and suffering, including (a) physical and emotional
pain and (b) loss of enjoyment in life.
Relevance of victim’s awareness
o Majority: require awareness for anything
o Dissent: Require awareness for recovery of
 Pain and suffering
 But not for loss of enjoyment in life
Class Notes:
o Is there a difference between
 Experiencing something negative (pain);
 And
 Failing to experience something positive (pleasure)?
 YES
o Should a comatose P be allowed to recover damages for
physical pain?
o Court recognizes that under its approach, the greater the
degree of brain damage D causes, the smaller is D’s
liability
 Is the court right that critics pointing out the
perverse incetives to act more tortiously?
o According to the dissent, what distinguishes punitive from
compensatory damages?
 Punitive damages exceed amount necessary to
replace what P has lost
 An amount equal to the value of the pleasures of life
is equal to what is lost
o Why would total awards differ based on the two jury
approaches?
 Would the jury have awarded a different total
amount if they had made a single award for pain
and suffering, including hedonic loss?
 Would probably present a smaller number if
asked to combine
 If they would differ, which result is appropriate?
 Larger number of 2 categories or smaller
number of 1 category?
o How would we then value hedonic loss?
Hedonic Damages
o One study found in 2005 that 5 states permit loss of
enjoyment of life (or hedonic damages)
o PA treats loss of pleasures of life as element of
“noneconomic loss”
o One study found
 Ex-Ante valuations 2x as high as Ex-Post valuations
(demand as compensation for the injury)
 We fear the unknown
 Generally, one finding is that people adapt to averse
circumstances
 People regain higher levels of happiness than they
think they would
 Finding that might imply that awards for pain and
suffering and hedonic loss should be lower than
they have been.
o Compensatory Damages in the Event of Death
 Loss of life damages seek to compensate a decedent for the loss of value
that the decedent would have placed on their own life.
 “Survival Actions” have traditionally included those damages
suffered by the decedent between injury and death. Cause of action
survives after death, so any pain and suffering experienced before
death is recoverable.
o Rationale: Injury can be death – and since you can be
compensated for injury, you may be compensated for death
o Since loss of life damages can only begin accruing at the
point when life is lost, at death, there is no reason to believe
the legislature intended to require the decedent to live for
any period of time between death any injury.
 Wrongful death actions
o Typically, P may not recover for decedent's pain and
suffering
o Most courts now allow P to recover for his or her own
nonpecuniary damages
 Courts are split on whether this should be
discounted
o Pecuniary loss for lost income equals net expected earnings
minus the decedent’s personal consumption
 Death Cases
o Interaction of survival and wrongful death statutes
 States are not uniform in merging survival and
wrongful death actions
 Alabama (unusual) only punitive damages may be
recovered under the wrongful death statute
 If victim is injured because of D, sues, then dies
from those injuries, “personal representative” may
 (slides)
o Damages for injuries to non-wage earners
 How should damages, pecuniary or nonpecuniary,
be measured when injuries are sustained by nonwage earners?
 Children? Non-working spouse?
 Homemaker?
o Add up costs of buying services in
the market, then discount?
 Likely understate value
 Add a premium to reflect
“quality” of services
provided by family member?
o What if a homemaker gave up job
practicing law for $100,000 per year
to become a homemaker?
 Opportunity cost?
 Must be the case that being a
homemaker was worth AT
LEAST $100,000 if they
decided to give that up to be
homemakers
 Courts generally do not
accept this opportunity cost
measure
 Minor Child?
o No lost income
o Little basis for estimating lost
earning capacity, but could estimate
anyway based on national average or
personal characteristics and
demographic data
 Some states allow this
o Minimum estimate of parent’s loss
might be their cost in rearing child
up to time of child’s death –
opportunity cost
o Might allow parents to recover for
lost companionship
 Employer?
o Employer might have to incur search
and training costs to replace the
injured employee
 Generally disallowed (treats
the employee as if the
employee is a servant
(chattel))
 Method of Payment
 Tort judgements conventionally are
calculated to award one lump sum for past
and future damages
 Alternative methods would be to award an
amount for past damages periodically
 Which is preferable?
o Periodic
 Eliminates need to predict
some future events thus
reducing one kind of admin
cost
 Eliminates need to discount
to present value
o Lump Sum
 Reduces costs of admin to the
extent that fever judicial
proceedings are required
 Creates incentive for victim
to overcome disability as
quickly and completely as
possible
 Arkansas:
o One National Bank v. Pope (2008)
 An “estate seeking L.O.L. damages pursuant to
section 16-62-101(b) must present some evidence,
that the decedent valued his or her life.”
o A number of other states also permit recovery of L.O.L.
damages as a distinct item.
 Chase v. Fitzgerald (Conn. 1946)
 Damages resulting from death should
include destruction of the capacity to enjoy
life
o Hedonic Damages:

The term refers to loss of enjoyment of life
damages, the intangible value of life, as distinct
from the human capital value or lost earnings value.
o Vast majority of states have extended wrongful death
damages to cover harms such as loss of society, love,
companionship, protection, and affection. Jones v. Carvell
(1982)
 These damages provide the equivalent of loss of
consortium in common law.
o Few states allow for family members to recover from grief,
anxiety, distress due to L.O.L. claims
 Others seriously disagree with this. Saying that they
represent an emotional reaction to the loss of life.
o Punitive Damages
 Almost all states have concluded that, sometimes, damages may be
awarded to punish the defendant, to make a statement about society’s
disapproval of seriously culpable conduct, or to make an example of the
defendant for deterrence.
 Economic Justifications for PD
 Account for losses suffered by those with incognizable injuries
(e.g., employers)
 Account for the probability of apprehension and sanction that is
less than 1
o Adjustment for probability <1
 S = L/p
 Where:
 S = sanction
 L = victim’s loss
 P = probability of apprehension
o Example:
 S = 1,000 /.10
 S = $10,000
o The idea is that if we catch you, we have to punish you
more harshly for the crime
o Implies a “punitive multiple” of 10 (punitive multiple is
calculated at 1/p)
 Induce market transitions where wrongdoing constitutes pure
coercive wealth transfer
 Create more efficient civil alternative to criminal prosecution of
minor crimes

 Common Law


Mathias v. Accor Economy Lodging, Inc. (2003)
o Bed bug case
o P: brother and sister attacked by bed bugs while staying in
D’s Motel 6 (now a Red Roof Inn still owned by D)
o Is it fraud that the hotel rebranded the bed bugs as ticks?
 Yes
o Issue:
 Must a punitive-damages award be rejected as
excessive if the ratio between compensatory and
punitive damages exceeds single digits?
o Rule:
 A punitive-damages award is not impermissibly
excessive merely because the ratio between
compensatory and punitive damages exceeds single
digits.
o Procedure:
 Trial awarded damages
 District entered J for P
 Appellate affirmed
Class Notes:
o Should there be a relationship between compensatory
damages and punitive damages?
 Maybe
o Punitive damages governed almost uniformly by statute.
 Typical statute:
 Clear and convincing evidence
 D conduct is willful, wanton, or in reckless
disregard of the P’s rights.
 Not awarding punitive damages for negligence
alone
 Conscious failure to exercise due care constitutes
“willfulness.”
 “Person of ordinary reason and prudence
conscious invasion of a person’s individual
rights”
 NJ
o Knowledge of harm and recklessness
o “I know and just don’t care”
o Majority view: in comparative fault state, P’s punitive
award is not reduced to reflect any fault by P.
 Is this sound?

o Some courts refuse to permit punitive damages in
derivative cases because injured party may recover punitive
damages in main cause
o Some courts refuse to permit punitive damages where
causation between P’s act and injury is not clear
o Some states hold that punitive damages flow with vicarious
liability
o Restatement: Found highlighted in yellow below.
Reading Notes:
o Punitive damages as punishment
 Retribution and Deterrence reasons
 Also called extra compensatory damages
o The Pinto case
 Grimshaw v. Ford Motor Co. (1981)
 Defective Ford Pinto blew up when rearended
 Passenger was badly burned, driver died
 Internal memo showed they knew that the
thing was defective, knew it was unsafe, but
did not want to spend the money to make it
safer because the lawsuits for death would
be less expensive due to a cost benefit
analysis.
 Balanced human lives against profits and
valued the profits more
 HUGE award given to plaintiffs
 Post facts coming to light prove that the car was no
less safe than other cars.
 Harder to justify the damages granted
 NEVER argue that a manufacturer intentionally put
a dangerous feature into a product. You will most
likely lose on liability
o Behavior that Merits Punitive Damages
 Appropriate culpability standard?
 Unanimously agreed that you need more
than ordinary negligence
 California
 Malice
o Intended to injure the plaintiff
o Willful and conscious disregard
 Oppression
o Cruel and unjust hardship in
conscious disregard of the person

o
o
o
o
o
Fraud
o Intentional misrepresentation, deceit,
or concealment of a material fact
known to D with the intention of D
to deprive of rights or create injury
 PROVEN BY CLEAR AND
CONVINGING EVIDENCE
Liability for Punitive Damages When the Tortfeasor or
Victim Dies
 Majority of states do not permit a plaintiff to
recover punitive damages from the estate of a
deceased tortfeasor.
 A slim majority of states permit a decedent’s estate
to recover punitive damages after the victim’s
death, a strong minority however, bar such
recoveries.
Punitive Damages and Deterrence
 An element of compensatory damages is deterrence,
but also an element for punitive
Employer Liability
 Vicarious Liability
 States have varying positions
 Some say yes
 Some follow R2d
o Punitive damages recoverable if
 Principal managerial agent
authorized the act
 OR
 The agent was unfit and the
principal or a managerial
agent was reckless in
employing/retaining them
 OR
 The agent was employed in a
managerial capacity and was
acting in the scope of
employment
 OR
 The principal or a managerial
agent of the principal ratified
or approved the act.
Passage of Time
Governmental Liability


Often not subject to liability for punitive damages
 Under FTCA
o Comparative Responsibility
o The Practice of Punitive Damages
o Statutory Change
o Punitive damage recoveries are taxable
o Punitive (slides)
Constitutional Limitations (oct 26)
 Supreme court’s analysis on the constraints of rewarding punitive
damages has varied over time
 5th Amendment
o No person shall be deprived of life, liberty, property
without due process of law”
 Violation requires:
 Constitutional deprivation
 Life or a liberty or property interest
 For procedural due process infringement,
inadequate process, where process that is
“due” varies with magnitude of private
interest at stake and gov. Burden of
providing additional process (akin to Hand
Formula)
 Prof. Chemerinsky
 PROCEDURAL due process... asks
whether the government has followed the
proper procedures when it takes away life
liberty or property
 SUBSTANTIVE due process... asks
whether the government’s deprivation of a
person’s life, liberty or property is justified
by a sufficient purpose
o Some justices do not believe that
there is such a thing as substantive
due process
o May involve the protection of
unenumerated constitutional rights
th
o 14 Amendment
 “Nor shall any state deprive any person of life
liberty or property without due process of law”
 “Nor deny to any person within its jurisdiction the
equal protection of the laws”

Note: 14th amendment due process applicable to the
states, incorporates most of the bill of rights
applicable to the federal government
o Potential Constitutional Constraints on Punitive Awards
 Equal protection
 E.g. State law provides that punitive
damages may be imposed only on out-ofstate residents
 Procedural Due Process
 E.g. State law provides that an appellate
court is not permitted to review size of
punitive damages award
 Substantive Due Process
 E.g. state imposes grossly excessive punitive
damages relative to the offense
 Most of the cases the court looks at are in
this category
 Pacific Mutual Life Ins. Co. V. Haslip
o Punitive damages more than 4x?
Unconstitutional?
 BMW of N. Am. V. Gore (1996)
o Procedure:
 Jury returned verdict for
$4mil in punitive basing
damages off of every car sold
in the country
 AL supreme court said
incorrect to base on damages
outside of AL - $2 mil
 SCOTUS reversed award –
grossly excessive - “state
may not punish someone for
conduct that happened in
other jurisdictions that was
lawful where it occurred and
that has no impact on its own
residents – but also $2mile
was grossly excessive when
compared to the $56,000 in
damages
o SCOTUS “guide posts”
 Degree of reprehensibility of
D’s conduct


Raton of punitive award to
actual or potential harm
inflicted on P (no bright line
rule – AL supreme court here
allowed ration of about 36 to
1)
 Difference between the
punitive award and criminal
and civil penalties that could
be imposed for comparable
misconduct
State Farm Mutual Automobile Insurance Co. v. Campell
o Issue:
 Whether an award by a state court of $145 million
in punitive damages, where full compensatory
damages are $1 million, is excessive and in
violation of the Due Process Clause of the
Fourteenth Amendment.
o Rule:
 Awards of punitive damages by state courts that
exceed a single-digit ratio between punitive
damages and compensatory damages are usually
“grossly excessive” and violate the Due Process
Clause of the Fourteenth Amendment.
o Class Notes:
 $50,000 policy limit
 Policy holder sued state farm for (inter alia) bad
faith refusal to settle
 Holding:
 Generally, a state may not impose punitive
damages to punish D for unlawful acts
committed outside of its jurisdiction
 “Few awards exceeding a single-digit ratio
between punitive and compensatory
damages, to a significant degree, will satisfy
due process.”
o Greater rations may be proper where
a particularly egregious act has
resulted in only a small amount of
econ damages
o Lesser ratios (even 1:1) may be all
that is constitutionally allowed when
compensatory damages are large
o Notes:
 History of the case
 Reprehensibility (Gore guideposts on p. 763)
 Harm caused was physical as opposed to
economic
 Tortious conduct
 3
 4 – Conduct involved repeated actions or
was an isolated incident
 5 – Harm was result of intentional malice,
trickery, or deceit, or mere accident
 Defendant’s wealth
 Harms to non-parties
 Deterrence
 Impact of Campbell and Williams
 Williams
o Procedural Due process forbids a
State to use punitive damages award
to punish a defendant for injury that
in inflicts upon nonparties or those
whom they directly represent, I.e.,
injury that it inflicts... (slides)
o Question: if D injures people all
over the country, isn't their conduct
more reprehensible than if he
injures people in a single state?
 In Williams harm to others is
relevant to reprehensibility
 Evidence of actual harm to
nonparties can help to show
that conduct that harmed P
also posed sub risk of herm to
gen pub and so was
particularly reprehensible
 But a jury may NOT go
further ans use a punitive
damages verdict to punish a
defendant on account of
harms
 DUE PROCESS CLAUSE
requires states to provide
assurance that juries are not
asking the wrong questions,



I.e. reeking not simply to
determine reprehensibility
but also to harm caused ….
(slides)
o Isn't reprehensibility one of the
Gore guideposts?
 US ex rel. Pileco, Inc. V. Slurry Sys., Inc
o Without proof of actual damage,
punitive damages may not be
awarded
o See Gore - single digit ratio
 In re Actos Prods. Liab. Litig. (W.D. La.
2014)
o Reducing damages for defective drug
because of due process
 Bullock v. Philip Morris (2011)
o Smoking death case
 Cooper Indus., Inc. V. Leatherman Tool
Group, Inc. (2011)
o Courts of appeals should apply a de
novo standard of review... (slides)
Statutory Changes
 A few states have abolished punitive
damages
 A few states require P’s to share punitive
awards with the state
 About half states impose higher “clear and
convincing” burden of persuasion
o Other half retain usual
preponderance of the evidence
standard
 About a dozen states place caps on punitive
awards, either based on dollar amount or
ration of punitive to compensatory damages
o In most states, jury is not to be
informed of the cap
The binding ratio in maritime cases
Repetitive awards
 Some have argued that punitive damages
should be awarded once and that their
repeated imposition may violate due
process.
- Tort Law and Insurance
o Demand for Insurance
 Risk aversion: utility of a certain prospect of money income is
considered prospect of money income is considered higher than the
expected utility of an uncertain prospect of equal expected monetary
value (EMV).
 EMV: of an act with multiple possible outcomes is the summation of the
value of each outcome multiplied by the probability of that outcome
occurring
 Symbolically





Principle
 Risk aversion is an implication of the declining marginal utility of
money income
o Daniel Bernoulli 1700-1782 Swiss Mathematician
 Most people are risk averse
 Depending on where you start, the same amount will mean more to
you earlier on in the curve than later on
Risk Neutrality
 Person
Risk-Preferring
 Person prefers an uncertain prospect of income to a certain
Disparate Attitudes

o
Hypothetical
 Person earns $100k per year
 Faces a risk that she will become disabled
 If risk does not materialize, she will earn the full amount
 If risk does, she will earn $20k
 She is risk averse
 Estimates risk of disability 10%
 If her utility function
 Expected monetary value of her salary, given risk of incapacity, is $92,000
 EMV here reflects uncertainty
 If she is risk averse, she will pay up to an amount such that when it is
deducted from her salary, she is certain to be left with an amount that
provides utility equal to the utility of an uncertain sum of $92,000

Loss Aversion
 Person who is risk averse prefers certain gain to a gamble
 Person who is loss-averse prefers
 Gamble with 90% chance of losing $1k and a 10% chance of
 In utility theory, utility of a gain or loss is assessed by comparing utilities
of two states of wealth
 In prospect theory -- slides
 Most people are more interested in avoiding a loss than
experiencing a gain
 The psychological impact of loss is greater than the psychological impact
of gain
 Widely considered the most important idea of behavior
o Humans are more motivated by fear than by motivation
 HOWEVER – this is a fallacy – when you actually study this – you
find that this is not true
o Risk Aversion
 Purchase Market Insurance
 Risk premium cannot exceed gain in utility from converting value
of risky event to value of certain event of equal monetary value
 Actuarially fair insurance premium equals the expected monetary
value of the loss (plus an administrative load)
o Probability of loss multiplied by magnitude of loss
 Self-insure
 Individual has better information than third party insurer abut
idiosyncratic risk
o Specifically, probability
 But to insure, individual must be able to diversify (combine
unrelated risks)
o Supply of Insurance (Market)
 Explained by law of large numbers, not risk preference
o Kinds of Market Insurance
o
 “First-party insurance” - underlying loss will be suffered directly by the
insured
 Coverage for the economic effects of some probabilistic event,
such as fire, death disability and damage to insured’s auto
 Examples:
o Medical Payments Coverage
o Collision Insurance
o Comprehensive Coverage
o Personal Injury Protection
 “Third-party insurance” - liability insurance taken out to protect the
insured against the economic impact of having to pay damages to another
person.
 Coverage for damages that insured is legally obligated to pay for
another
 The loss will be suffered by a third person (tort plaintiff) and cost
shift to the insured (tort defendant).
 Examples:
o Bodily Injury Liability
o Property Damage Liability
 You can have a policy with both first- and third-party insurance
 Homeowner’s Insurance
 Uninsured Motorists Coverage
o Problems of the Insurer (do not face these problems if you are self insuring)
 Moral Hazard
 Incentive actor has after becoming insured to change his behavior
in ways that reduce his costs but increase his expected loss
o After person is insured, taking precautions entails a
marginal cost but returns no marginal benefit because she
will be compensated for any loss
o Person may even have an incentive to cause the insured
loss, if compensation exists
o Responses to moral hazard:
 Require that insured sustain uninsured loss if
insured event occurs
 How?
o Insurable Interest:
 Policy holder must have a
pecuniary stake apart from
the policy itself in the insured
event
 Cannot obtain life insurance
on neighbor
 Response to moral hazard is
not the only reason to impose
insurable interest
o Use deductibles and co-insurance
 Deductible: Dollar amount
of loss that policy does not
cover
 Insured incurs a cost (through
deductible) if loss occurs
 Co-Insurance: % of loss that
policy does not cover
 Insured incurs a cost if loss
occurs
 Adverse Selection
 Why do all-you-can-eat buffets exist?
o Diner apparently knows beforehand how hungry he is
o Buffet sets price at average cost
o Hungry diners (high cost) buy buffet
 Responses to Adverse Selection:
o Compel everyone to buy insurance (e.g., Affordable Care
Act)
 Uniquely governmental response
o Require deductibles and co-insurance
 Evidence suggests that risk aversion is sometimes
correlated with low risk
 Those willing to accept high deductibles and
coinsurance might have low expected costs
o Us more precise risk categories (I.e., “rating”)
 Viability depends upon costs of defining and
enforcing more precise categories relative to
benefits
o Exclude coverage for pre-existing conditions
o Tort Law and First Party Insurance
 The Collateral Source Rule
 Kenny v. Liston
o Substantive
 Drunk driving case (D drunk driver) with
permanent spinal injury to P

o
o
o
o
o
o
P submitted medical bills of $74,000 and sought to
recover this amount in damages
 By agreement between P’s insurer and his medical
providers, providers discounted their bills to insurer
and wrote off unpaid expenses
 D says that he should only pay med expenses that
were actually incurred
Procedure
 Trial court rejected D’s argument
 Jury returned verdict that included damages for full
amount of medical bills
 Supreme court affirmed
Issue:
 Under the collateral-source rule, is a plaintiff
entitled to recover damages for the full value of all
reasonable and necessary medical services,
regardless of whether the services were reduced,
discounted, or gratuitously provided by another?
Answer: YES
Holding:
 The collateral source rule (CSL) protects the
amounts discounted from P’s medical bill or written
off by the
What kinds of benefits are protected by substantive
collateral source rule in W. Va?
 Insurance and employment benefits
 Gratuities
 Social legislation benefits
Notes:
 Collateral Source Rule
 Collateral Source Rule:
o In a lawsuit, any compensation that
an injured person has received from
a source other than the person who is
legally responsible for the injuries
(the defendant) will not reduce the
amount of damages recoverable from
the defendant.
 Substantive Collateral Source Rule
o Any benefit received by P from
source other than D as a result of
D’s tort do not reduce D’s Liability
 Rule of damages


Evidentiary Collateral Source Rule
o D may not introduce evidence in a
personal injury or wrongful death
suit that P’s damages have been paid
by a collateral source
 Rule of evidence
Rationale for the Rule
 Suppose P is employed by his brother-inlaw, who pays P his $50,000 salary even
though P is disabled?
o Is that payment subject to the CSR?
 Most likely yes – most likely
under gratuities
 Yes, thus no offset
 Suppose D’s brother-in-law gives P $50,000
to make up for P’s lost income?
o Is payment subject to CSR?
 Most likely category would
be gratuity... but who are you
trying to help? Obviously, D
 Donation to P or to D
 NOT SUBJECT TO CSR
 Distinguished on donative
intent
 Some courts say that any gift is
presumptively given for the benefit of the
donee and thus does not offset D’s liability
o Presumption can be rebutted
 Suppose during P’s convalescence, P’s
mother provides nursing care with a market
value of $50k
o Is P entitled to recover the value
(50,000) from d?
 Majority rule is that the
plaintiff can recover – value
is subject to the CSR
 What are we trying to do with tort law?
o Two goals:
 Compensatory
 Deterrent
 Collateral source rule justifications
o Helps to insure full compensation for
P. How?


Monetary damages cannot
accurately value bodily injury
 Part of damages award
usually compensates atty
o Creates incentives to engage in
value-increasing conduct (deterrent
function). Why?
 Potential victims are
encouraged to invest in
insurance; without CSR, no
incentive to invest because
proceeds will reduce tort
recovery
o Avoids giving tortfeasor a windfall
(or under-deterring tortfeasor). Why?
 Tortfeasor’s liability would
be reduced because of the
fortuity that his victim had
insurance
 Specifically on gratuitous payments
o Promotes full compensation
o Creates incentives for efficient
behavior?
 Does not directly encourage
productive investments by
potential victims
o Prevents tortfeasor windfall
 Does increase liklihood of
donations
Hypotheticals
 Suppose health care provider quotes insurer
a list prive of 10k for procedure
 Insurer negs a full price of 7k (3k disc) for
its subs
 To make up for lost rev, HCP then sets a
new list price of and charges other patients
12k
 P insured by insurer, requires procedure as a
result of D’s tort
o How much is subject to CSR?
 12k billing/list price
o Can this be justified?
 Promotes full comp





Encourages productive
investments
o Kenny court reasons that the amount
of medical expense discounted or
written off can be considered both
 A benefit of P’s bargain with
his health insurance carrier
AND
 A gratuitous benefit arising
from P’s bargain with the
medical provider.
o Is this a write-off truly a gratuity?
 Dissent says this is not,
arguing that it is a contractual
quid pro quo
Suppose alternatively:
Healthcare provider sets new list price of
20k but charges no patient more than 12k
o Under the majority’s view, what is
subject to CSR?
 Court seems to say that CSR
applies to the amount billed
(20k) without considering
whether HCP actually
collects that amount from any
payor
o Under dissent – CSR protects only
the amount the insurer or someone
on behalf of P actually pays
Who has the better argument?
o Some courts take the dissent and
some take the majority approach
o Some courts hold that CSR
protects the “reasonable value” of
the services performed
 Likely more than the amount
paid but may be less than
amount billed
What do we mean by value?
o Market value is what people are
willing to pay
o Value is a function of willingness to
pay
o
 Billed or Paid?
 Public Benefits
 The plaintiff who has purchased insurance is
assumed to have paid consideration for the
negotiated rate differential as much as for
the actual cash payments made by the
insurer to the medical care providers?
 Do government benefits reduce D’s liability;
or are subject to CSR and thus do not reduce
D’s liability?
o R2d – social legislation benefits are
subject to the collateral source rule
and will not reduce the P’s recovery
o Some courts take this position, and
some do not
 NY –yes
 DE – no
 Look for the collateral source rule slide for
Oct 28
 Statutory Change
 About half of the states have decided this via
statute
 Distinguish between two questions
applicable to substantive CSR
o Should D receive benefit of payment
from collateral source, so that his
liability is reduced?
o If D’s liability is not reduces, may
the collateral source recover its
payment to P?
 I.e. does collateral source
have right of subrogation?

 Windfall
o Medical Expenses and the CSR
 Higgs v. Costa Crociere SPA
 Jury awards 61,000
 District ct reduced award to 16,00 (amount
paid
 Supreme reversed district

o Holding: appropriate measure of
medical damages in a maritime tort
case is the reasonable value
determined by the jury upon
consideration of any relevant
evidence, including the amount
billed, the amount paid, etc
 Rationale:
o Send it to the jury and throw any
evidence you want at it
o Critics make two arguments:
 Write-off is a collateral
payment and CRS bars
evidentiary collateral source
rule
 Evidence of the amount paid
encourages the jury to
abandon the substantive
aspects
Moorhead: Pennsylvania – CSR is measured by the
amount actually paid
 Anything beyond the amount paid is
supercompensatory
 Focus only on compensation
 Subrogation
 Frost v. Porter Leasing Corp.
o Frost received medical expense benefits of 22,700 under
employment health insurance plan after Frost was injured
by tortfeasor
o Policy contained no subrogation clause in the contract
o Decision:
 Subrogation right may be express or implied
 Implied subrogation is often found in
property insurance contracts
 Implied sub is generally not found for
personal insurance
 Insurance policies covering medical expenses will
be treated as personal insurance – no subrogation
implied
o Note:
 When 3rd party to tort (“subrogee”), such as insurer,
has right of subrogation (slidessssss)
o Rule:

o
o
o
o
o
The doctrine of subrogation permits an insurer,
who has paid the insured injured party for certain
types of losses, to share in the insured’s recovery
against the tortfeasor for those losses.
Subrogation:
 the substitution of one person or group by another
in respect of a debt or insurance claim,
accompanied by the transfer of any associated rights
and duties.
 Substitution of one person for another with respect
to a claim, accompanied by transfer of associated
rights and duties
 In this case the insurer is the subrogee and
the victim is the subrogor
Indemnity
 .
Sequence of tort and insurance
Is a party who indemnifies another party subrogated to that
other party’s rights?
Notes:
 Difference between “property” insurance and
“personal” insurance
 Why are med expenses unlike property
damage and like personal insurance such as
life insurance?
o Like property damage, medical
expenses have an easily discernible
value that fully measures relevant
loss
o Personal insurance by contrast likely
does not compensate for intangible
losses and thus refusing to find
implied subrogation
 This court
o Separating med expenses from other
elements of personal insurance is
artificial and refusing to imply
subrogation right is unlikely to result
in duplicative recovery
 Both the majority and concurrence refuse to
infer subrogation right
o What’s the difference between them?




Majority: finding implied
right of sub for medical and
health expenses would entail
high administrative costs and
is not necessary to prevent
duplicative recovery
Concurrence:
 In the absence of a subrogation provision, an
insurer who pays medical expenses is not
entitled to subrogation of those amounts
paid, not because of any claimed
administration problems of such a system,
but rather because, out of fairness to the
insured, and insurance policy should
disclose limitation of the coverage,
including the possibility of subrogation
claims.
 Finding right would not be difficult to
administer and would curtail costs of
medical care, but parties should be induced
to make subrogation right explicit.
Is the existence of an implied right of subrogation
really a contracts issue?
 As a matter of contract principles, when
would it be proper to infer a right of
subrogation?
o When transaction costs of
negotiating the express term would
be high and the parties would have
voluntarily allocated the risk by
providing for subrogation had they
bargained over it
 Under contract principles, should an implied
right of subrogation as to medical expenses
be found?
o The contingency is not remote and
the parties are agreeing on a host of
other terms, suggesting that
transaction costs are low
o There is no good reason to imply a
right of subrogation here.
Hypothetical:


A sells land to B with a warranty that the
land is not contaminated
 Land is found to be contaminated, because
the conduct of C before A owned it
 B recovers damages from A for breach of
warranty
 A seeks indemnity from C
 Result? - can we shift the loss (indemnify)?
o Wilder Corp.
 “Indemnity” means security
from damage
 Most common form today is
an insurance contract where
the insurer secures the
insured from harm by shifting
costs to the insurer
 A tort doctrine of indemnity
shifts the burden of liability
from a blameless tortfeasor to
a blameworthy one
 A k breacher has no right of
indemnity against a third
party
o A has no implied right of
subrogation to B’s rights - A could
have negotiated this into the k but
did not
Legal Fees
 To have subrogation – it must share the legal
costs incurred by insured in obtaining
compensation from tortfeasor
 Insurance contracts can exclude duty to
defend
 Otherwise if P asserts even one claim that
can rationally be said to fall within policy
coverage, even if allegations are groundless,
false, or fraud, insurer is liable for litigation
defense costs
 Am. Zurich Ins. Co. V. Wilcox &
Christopoulos, LLC
 Thee Aguila, Inc v. Penn Star Ins. Co.
o Insured must only claim that the
underlying claim may fall within

policy coverage; insurer must prove
it cannot
 What if duty to defend covered meritorious
but not groundless claims?
o Any rule other than one under which
groundless claims are covered would
have the paradoxical effect that the
less meritorious the suit, the less
coverage you will have and the more
you have to pay
 Lockwood Int’l BV v. Volm Bag Co.
 Suppose insurer with duty to defend hired
atty for insured
o Atty in course of insured’s defense
commits malpractice
o Malpractice results in insurer beign
held liable for more than it otherwise
would have been
 Can insurer sue atty? Even though atty
repped and had fiduciary duty only to
insured?
o Most courts say yes
o Sentry Select Ins Co
 If the interests of the client
are the slightest bit
inconsistent with the
insurer’s interests, there can
be no liability of the atty to
the insurer
Hypothetical
 Outbreak of hep-b from ingredient company
that supplied juice company and bad
equipment
 Juice sues ingredient for indemnity
 Townsend Farms, Inc.
o Affirmed district court’s refusal to
set aside the 3mil
o Judge properly instructed jury to
apportion fault
o Jury’s award of less than full
settlement costs was an implicit
finding that ingredient corp was not
at fault

Insurance and Punitive Damages
 Policy may exclude coverage of loss from
conduct triggering punitive damages (eg
intentional torts)
o Some states prohibit insurance
coverage of intentional torts
 If the policy is silent on the conduct
o Most states will force insurer to
cover punitive award against
tortfeasor-insured
o Some preclude payment by insurer
on grounds of public policy
o Some require the insurer to pay, but
allow insurer to recover punitive
damages against the tortfeasor
insured
 Insurable Interest
 Universal rule: a party must have an
insurable interest in a person’s life to obtain
a life insurance policy on that person’s life
o Reasons
 Protect against moral hazard
 (slides)
 Person may insure his or her own life and
the lives of close relatives
 Creditors may protect their loans by taking
out life insurance policies on people they
have loaned money to
 Common law remedy for buying (slides)
 Express Subrogation
 Express is through the insurance policy
 Implied is by judge
 The Problem of Settlement

 Allocation of Settlement Proceeds

 Insurer v. Insurer

 Totaling up the costs

 Subrogation and the Collateral Source Rule
 First-Party Insurance and the Extent of Tort Liability
 The Collateral Source Rule and Loss Allocation in Tort Law
o Collateral Source Rule:
 In a lawsuit, any compensation that an injured
person has received from a source other than the
person who is legally responsible for the injuries
(the defendant) will not reduce the amount of
damages recoverable from the defendant.
- Tort Law and Liability Insurance
o Historical Background
 All else being equal, liability insurance reduces the cost of risky behavior
for the insured, thereby reducing the burden of the proposed tort duty and
making it easier to justify. - Judge Friendly
 Automobile Insurance
 When the car was introduced, the court tried to adopt vicarious
liability, negligent entrustment, and joint enterprise doctrines in an
attempt to adapt to the changing technology
 Then two contract provisions emerged
o Covering liability for the negligence of anyone driving the
car
o Insured was protected when driving any car with the
owner’s permission
 The provisions were necessary because (from the beginning) the
vehicle was insured and not the individual driver
 By the mid 50’s, there was a push to make automobile insurance
compulsory
 Non-Auto Liability Insurance
 Examples: Medical malpractice, legal malpractice, defective
products, liability for defective premises, commercial general
liability (CGL)
o Combined liability and first party property coverage –
commercial multi-peril
o The Problem of Moral Hazard
 Moral Hazard: (term of art) the idea that an insured person may take less
care to avoid harm than they would if they expected to bear the full cost of
the harm
 Approaches to resolve moral hazzard
 Insurers have tactics to prevent moral hazard situations
o Underwriting
o Deductibles and co-payments
o Experience rating
o Ex-Post Auditing
 Courts and legislatures have adopted an “insurable interest”




requirement
o Limiting what may be insured and by whom
 No life insurance policies on your neighbor
 Liberty National Life Insurance Co. (1957)
 Aunt takes out illegal life insurance policy
on young child. Kills child to collect money.
Liability insurance policies generally exclude coverage for harms
that were “expected or intended” by the policyholder.
o “Foresees that harm is practically certain to occur as the
result of the insured’s intentional act” - Restatement of Law
and Liability Insurance
Some courts and legislatures exclude insurance coverage for
punitive damages (but this engenders significant controversy)
Sun Life Assurance Co.
o Result: must pay
o Rationale:
 Wis statute deters insures from issuing policies to
persons without insurable interest by making
insurers pay someone if they do issue them
 Statute authorizes the court to order death benefit
paid to someone else, but only to a someone else
who is equitably entitled to it
Suint Insurer:
o Hypo 1
 Insurance policy limit is $100k
 Tort P’s claim against insured is 4 mil
 Ps settlement offer is 100k
 Insurer litigation costs 50k
 Insurer's settlement cost is 0
 Insurer's interest: settle for 100k only if it assesses
probability of P prevailing at trial at above 50%
 Can settle for 100k or litigate at 110k
 At 50%?
 Can settle for 100k or litigate at 100k
 Don’t care
 Insured's interest: If prob of P prevailing is 50%
STRONGLY FAVORS settlement
 If insurer litigates, expected deficiency
judgement for which D would be liable is
1.9 million
 If insurer setttles?
 We have an agency problem as a result
o Hypo 2
 Same but prob of P winning is 5%
 .
o Pavia situation
 Some note that the problem of moral hazard might be overstated?
 Threat of civil liability is hardly the only check on careless
behavior?
o Driving carefully to protect yourself and your passengers
for example
o The Impact of Liability Insurance on Tort Litigation
 Jury is not to be told whether a P is insured
 Roman v. Mitchell (1980)
o You may not ask jury questions relating to insurance
companies or about P’s insurance.
 Rogers v. Pascagoula Public School District (1992)
o D admitted liability for a bus crash and the jury awarded
nothing for pain and suffering or other non-economic
damages
 Jury made up of taxpayers didn’t want their tax
money used for damages, even though that was a
misconception
 Most Americans are judgement-proof
 For example, bankruptcy law protects substantial personal assets
from collection from creditors and tort plaintiffs
 Also, to force someone to pay who doesn’t pay voluntarily is
costly for the P and their atty
 Real money from real people makes up an incredibly small % of tort
settlement $
o Pavia v. State Farm Mutual Automobile Insurance Co. (1993)
 Holding:
 “In order to establish a prima facie case of bad faith, the plaintiff
must establish that the insurer’s conduct contributed a gross
disregard of the insured’s interests – that is, a deliberate or reckless
failure to place on equal footing the interests of its insured with its
own interests when considering a settlement offer.”
o “Gross Disregard Standard” used, balances between
requiring more than ordinary negligence and less than
dishonest motives.
o Bad faith may only be established where liability is clear
and potential recovery far exceeds the insurance coverage
o You can sue as long as you meet the gross disregard
standard
 Alternative standards?
o Negligence?
o Always liable?
 Rule
 An insurer has an implied duty to act in good faith in defending
and settling claims over which it has exclusive control on behalf of
an insured.
 Procedure:
 Jury for P
 Appellate Division affirmed
 Appellate Division decision reversed and action dismissed
 Notes
 The duty to defend and the duty to indemnify
 Conflicts when duty to indemnify and duty to defend may diverge
o Twin City Fire Insurance Co. V. Ben Arnold-Sunbelt
Beverage Co. Of South Carolina (2005)
 Because the insurer can have a duty to defend a case
in which it will not necessarily have a duty to
indemnify (compensate for harm or loss), the
insurer can have a conflict of interest
 The Defense Attorney’s Conflict of Interest
o Defense lawyer is typically selected and compensated by
the insurer but is supposed to represent the insured
o When the insured and insurer’s interests diverge – the
insurer is not the atty’s client simply by selecting and
compensating them. They would have had to establish a
relationship by other means
o Lawyer must proceed in the best interests of the insured
(but perhaps the insurer as a co-client when applicable)
 States differ
 The Insurer’s Duty of Good Faith to the Policy Holder
o In many jurisdictions, the insurer breaches their duty to
settle when rejecting a “reasonable” settlement offer – one
that would be accepted by an insurer if it bore “sole
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financial responsibility for the full amount of the potential
judgement”
Punitive Damages Redux
o NY Ct of App refused to extend bad faith claims for
underlying judgements involving punitive damages
 Soto v. State Farm Insurance Co. (1994)
 Insurer paid all compensatory damages but
no punitive damages and P sued for failure
to settle
 Court concluded that a rule permitting
recovery for excess civil judgments
attributable to punitive damage awards
would be unsound public policy
 Why would we punish an insurance
company as a wrongdoer when they were
not at fault
o There is no deterrence function here
The Bad Faith Setup
o Since a breach of the duty to settle can subject an insurer to
liability in excess of the policy limits, tort Ps have incentive
to induce such a breach.
o Terrible ethics
The Insurer’s Duty of Good Faith to the Tort Plaintiff
o Some tort plaintiffs have sued the liability insurer of the
defendant, claiming that the liability insurer owes a good
faith duty to the tort plaintiff in settling the matter.
The Role of Liability Insurers with Respect to Settlements Covered
by the Policy
Suing Insurer: Hypothetical III
o You cannot turn