How to avoid punitive damage awards

Punitive damage awards remain a financial menace to corporate America. While proposed legislation intends to cap punitive awards, passage remains doubtful. Companies, hence, must take action to protect themselves and their shareholders from punitive damages, claims, and litigation.

Punitive damage awards occur when an injured plaintiff establishes that the defendant caused harm while acting with malice or in willful, wanton disregard for the safety of consumers and the public. Unlike compensatory damages, which are intended to reimburse an injured party for out-of-pocket expenses and pain and suffering, punitive awards are intended to punish the errant defendant and to deter such subsequent conduct.

Horror stories abound regarding punitive damages imposed on corporate defendants. At times, the defendant manufacturer simply gets its just desserts, but relatively innocent litigants are slammed with punitive awards too.

Prime examples. Among reported cases is the now infamous Ford Pinto California verdict which awarded some $124 million to the plaintiff. More recently, a Georgia jury awarded $105.2 million against General Motors, including a $101 million punitive award. The case has been overturned by the Appeals Court, which ruled that the plaintiff's counsel had improperly referred to other lawsuits and deaths allegedly involving the same model truck.

In West Virginia, TXO, a Texas subsidiary of U.S. Steel, allegedly engaged in a bad-faith scheme to recapture oil and gas development rights it had previously ceded to another business, Alliance Resources. At trial, the jury found TXO negligent and awarded $19,000 in compensation damages and $10 million in punitive damages. On appeal, the Supreme Court of West Virginia affirmed the verdict finding TXO guilty of intentionally fraudulent conduct.

Although it varies by state, the basis for punitive damages generally requires proof that the defendant willfully disregarded safety or maliciously intended harm. However, juries have awarded staggering punitive awards, sometimes with no real basis as to the harm caused, the defendant's net worth, or the actual profit gained by the abhorrent behavior.

Signs of progress.The U.S. Supreme Court in Pacific Mutual Life Insurance Co. v. Haslip (1991) refused to strike down punitive damages, but left the door open to review cases with disproportionate punitive awards. Since this decision, appellate courts have reviewed punitive awards more analytically and fairly.

In addition, the Republican-controlled House of Representatives passed legislation to cap punitive awards and limit the number of such awards which may be made against a defendant for any one product. While this legislation faces tougher sledding in the Senate and Oval Office, it signifies a change in the right direction. Obviously, a company minimizes the threat of punitive awards by avoiding intentional malicious conduct calculated for its gain at the expense of others. Corporate records must reflect the company's commitment to safety.

Legal Questions

Q What is the justification for punitive damages if the plaintiff has already been the recipient of compensatory damages?

A Punitive damages are intended to punish individuals or companies who willfully and wantonly act with disregard to the safety of others. The goal is not to provide the plaintiff with a financial windfall but to discourage the gross misconduct from recurring.

Q Can one obtain insurance against punitive damages?

A Generally, no. To insure willful, wanton misconduct would be against public policy. However, there are exceptions. Some state courts recognize situations in which a punitive award may be insured if the liability of the manufacturer defendant were of a vicarious nature that is based on the gross misconduct of an agent or employee. However conduct by an individual or a top corporate officer is generally uninsured and must be paid by the individual or his/her company.

Q How can I or my company best avoid the prospects of a punitive damage lawsuit?

A By placing safety above profit. Virtually all punitive damage awards result when the defendant engages in conduct that totally disregards the rights and safety of another for economic gain and thus angers the jurors. Balancing safety with a reasonable economic profit in a responsible manner will minimize the prospects of any adverse punitive damage result.

To disregard a product's known dangers by failing to warn, redesign, or even recall where appropriate is to provide a basis for a punitive award.