A series of recent United States Supreme Court decisions have defined the standard for imposition of punitive damages.

In State Farm Mutual Insurance Company v. Campbell, 538 U.S. 408 (2003), the Supreme Court applied the guidepost it had previously established in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). The Gore decision directed appellate courts reviewing punitive damages awards to consider the following three factors: (1) the degree of reprehensibility of the defendant's misconduct; (2) the relationship between the actual and 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 comparable cases.

In State Farm, the Supreme Court emphasized that, of the three Gore factors, the single most important indicator of the reasonableness of the punitive damage award is the degree of reprehensibility of the defendant's conduct. The Supreme Court then applied the five factors it had previously set forth in Gore to measure the reprehensibility of the defendant's conduct: whether the harm was physical or economic; whether the tortuous conduct evinced an indifference to or reckless disregard for the health or safety of others; whether the conduct involved repeated actions or was an isolated incident; and whether the harm resulted from intentional malice, trickery, or deceit, or mere accident.

The United States Supreme Court heard oral arguments in Phillip Morris v. Williams, Number 05-1256, on October 31, 2006. In Phillip Morris, the Supreme Court will, for the first time, be asked to apply the Gore guideposts to a case involving the death of a plaintiff - a long time smoker who died of lung cancer - rather than a case of merely economic damages. In Phillip Morris, the Oregon Supreme Court upheld the punitive damage award to the family of a deceased smoker more than one hundred times the amount of actual damages. Phillip Morris' appeal presents two questions to the court: (1) whether, in reviewing a jury's award of punitive damages, an appellate court's conclusion that a defendant's conduct was highly reprehensible and analogous to crime can override the Constitution's requirement that punitive damages be reasonably related to the harm to the plaintiff; and (2) whether due process permits a jury to punish the defendant for the effect of its conduct on non-parties.

DEFENDING A COMPANY IN PUNITIVE DAMAGES CASE

Punitive damages often represent a significant, if not the most significant, exposure a company faces in litigation. Dealing with punitive damages must be part of a bigger litigation strategy. It is critical that a company, in conjunction with trial counsel, prepare a comprehensive plan of action to avoid, or minimize, the company's exposure to punitive damages. The plan of action should include discovery and witness selection intended to demonstrate the difference between any mistakes which were made, and conduct which was intended to cause harm. At trial, effort must be made to select jurors who will rationally analyze the evidence, rather than base their findings exclusively on anger or sympathy, to allow a chance for a positive outcome for the company.

INSURABILITY OF PUNITIVE DAMAGES

There is currently no clear guidance from either the Texas Legislature or the Texas Supreme Court on the issue of whether Texas public policy prohibits a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence. Texas appellate courts have long wrestled with the issue, and have reached different conclusions. Some courts have found that parties should be allowed to enter into contracts freely, and ensure that the insurers comply with their contractual obligations. See Am. Intern. Specialty Ins. Co. v. Triton Energy, Ltd., 52 SW.3d 337 (Tex. App. - Dallas, 2001). Other court have found that insuring punitive damages violates public policy, as it defeats the purpose of awarding punitive damages (to punish the wrongdoer and to deter similar behavior in the future), by permitting the wrongdoer to shift the burden of paying the punitive damages to its insurer. See Milligan v. State Farm Mut. Auto. Ins. Co., 940 SW.2d 228 (Tex. App. - Houston, 1997).

The Texas Supreme Court has thus far refused to address the issue of whether punitive damages are insurable. However, the Fifth Circuit Court of Appeals has certified questions concerning punitive damage awards to the Supreme Court of Texas, in a case filed in August 2004, which is currently pending before the Texas Supreme Court. See Fairfield Insurance Company v. Stevens Martin Paving, L.P., 381 F.3d 435 (5th Cir. 2004).