The California Supreme Court heard oral argument recently on an issue that is important to insurance policyholders forced to sue their insurers for bad faith and punitive damages: Whether an award of attorney fees should be included as compensatory damages for purposes of calculating the ratio between punitive and compensatory damages. The case is Nickerson v. Stonebridge Life Insurance Company.1

In California, when an insured prevails in a claim for bad faith against their insurer they are entitled to recover the attorney’s fees incurred to establish that the claim was covered under the insurance policy.2

Punitive damages—which are awarded when a defendant’s actions are reprehensible (i.e., when they arise from fraud, malice, or oppressive conduct)—are constitutionally limited to a ratio where they cannot be more than ten times the compensatory damages awarded.

This case arose after Mr. Nickerson was paralyzed in a 1997 snowmobile accident. He was subsequently hospitalized for nearly four months after he fractured two bones in his leg by falling off a ramp while exiting a van in February 2008. Treatment of Nickerson’s fractures was complicated by extensive swelling, infection, blistering and muscle damage that required intravenous fluids, antibiotics and hospital staff support, according to his complaint.

Following his release from the hospital, Nickerson submitted a claim to Stonebridge Life Insurance Company for the duration of his hospital stay under an accident hospital insurance policy. Stonebridge only agreed to pay for 19 days of the stay, deciding that the remainder of his hospitalization was not medically necessary.

After the jury found that that the “necessary treatment” limitation in Nickerson’s policy was unclear and unenforceable, it levied punitive damages against Stonebridge to send a message to the insurer because it had unreasonably relied on the same limitation in numerous other cases.

The jury awarded Mr. Nickerson $19 million dollars (of which only $35,000 constituted compensatory damages for the emotional pain and suffering Stonebridge had caused Mr. Nickerson) after finding that Stonebridge had acted fraudulently when it deemed much of Mr. Nickerson’s claim for the costs associated with his hospital stay unnecessary. The trial judge however later decided that the punitive damages were hemmed in by the U.S. Constitution and ordered a new trial unless Nickerson agreed to accept damages of just $350,000 instead. Importantly, the court refused to consider the amount of attorney’s fees (Brandt fees) awarded as a result of Stonebridge’s bad faith conduct when evaluating the 10:1 ratio permitted to determine punitive damages.

Nickerson appealed that ruling to the California Court of Appeal. Unfortunately, the Court of Appeal upheld the trial court’s decision by concluding that the Brandt fees should not have been included in the punitive damage proportionality analysis because they were awarded by the trial court as part of a post-trial proceeding and thus were not “technically” awarded by the jury as part of the compensatory damages.

If due process requires that punitive damages be limited to no more than ten times the compensatory damages awarded to an insured, public policy and the concept of fundamental fairness should also require that the attorney’s fees incurred by the insured to prove that they were entitled to policy benefits should also be included in that calculation.

I will keep you updated on this important question pending before the California Supreme Court.

1 Nickerson v. Stonebridge Life Ins. Co., Case No. S213873 (review granted, 352 P.3d 390).
2 Brandt v. Superior Court (Standard Ins. Co.) (1985) 37 Cal.3d 813, 817.
3 For a more in depth discussion of the Brandt case see Recovering Attorneys Fees in California Insurance Litigation Means Proving Bad Faith Damages.