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3d Circuit Uses Attorney Fees as Basis for Punitive Award

The 3d Circuit has let stand a punitive damage award that originally appeared to be nearly 75 times greater than the compensatory damages, finding that an award of attorney fees and costs — not the much lower compensatory damages figure— was the proper basis for the punitives.

The panel said the trial court properly met the punitive damage guideposts articulated by the U.S. Supreme Court in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003).

The lawsuit involved an insurance claim for property damage to the Willow Inn, a small family-owned restaurant that was severely damaged by a tornado in 1998. Willow Inn hired public adjusting firm Assured Adjustment on a contingency fee to assist in submitting an insurance claim to Public Service Mutual Insurance Co., but the restaurant encountered "sustained resistance" from PSM in paying the claim, court records say.

Willow Inn filed suit in Pennsylvania federal court, asserting a $2,000 breach-of-contract claim for the costs of preparing the proof-of-loss statement that accompanied the claim. The lawsuit also sought unspecified punitive damages plus attorney fees and costs under the state's bad-faith statute.

U.S. District Judge Berle M. Schiller of the Eastern District of Pennsylvania awarded Willow Inn $2,000 on the contract claim and $150,000 in punitive damages, plus $128,075 and $7,372, respectively, for attorney fees and costs.

On appeal in 2003 the U.S. Court of Appeals for the 3d Circuit upheld the compensatory award and the attorney fees and costs awards but asked Judge Schiller to explain the punitive damage award, finding that the Supreme Court decision in State Farm, handed down while the Willow Inn case was on appeal, may have affected it.

State Farm reinforced the "guideposts" the justices had enunciated in the 1996 decision in BMW of North America Inc. v. Gore, 517 U.S. 559 (1996), and the 3d Circuit found that Judge Schiller's original opinion did not explicitly apply those guideposts.

As set forth in State Farm, the three guideposts are:

• The degree of reprehensibility of the defendant's misconduct;
• The disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and
• The difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

On remand, Judge Schiller found that the punitive award complied with the guideposts. The $2,000 judgment — awarded as compensation for preparing a proof-of-loss statement — was not the proper yardstick by which to measure the punitive award, the judge said, because PSM did eventually pay the claim after more than two years had passed.

Rather, Judge Schiller ruled, punitives should be viewed in light of Willow Inn's total claim, especially since three of the aggravating factors associated with particularly reprehensible conduct were present: as a small business, Willow Inn was financially vulnerable; PSM's conduct was not limited to one instance but was part of a pattern of ignoring the claim; and the delay was intentional.

In the latest ruling, the 3d Circuit agreed, finding that PSM's conduct constituted bad faith as contemplated by state law and calling the $2,000 judgment a "red herring."

"We view the $2,000 award on Willow Inn's contract claim to be incidental to the punitive damages award," the opinion states. "It would be an improper term to use in the ratio analysis."

Instead, the appeals court found, the award of attorney fees and costs was "the proper term to compare to the punitive damages award for ratio purposes" and was "reasonable given the degree of reprehensibility of PSM's conduct."