California Supreme Court Holds that Brandt Fees Are Part of Compensatory Damages to be Assessed for Constitutionality of Punitive Damages Awards

On June 9, 2016, in Nickerson v. Stonebridge Life Ins. Co. (2016) 2016 Cal. LEXIS 3757, the California Supreme Court ruled that Brandt fees, either awarded by a jury or a court, must be considered to determine whether and to what extent a punitive damages award exceeds constitutional bounds.

The insured sued his insurer for breach of contract and bad faith for failure to pay benefits under an indemnity benefit policy. The policy promised to pay the insured $350 per day for each day the insured was confined in a hospital for medically necessary care and treatment of a covered injury. The insurer paid only 18 out of 109 days of hospitalization.

The case proceeded to verdict and the jury awarded the insured $31,500 for breach of contract, $35,000 for bad faith, and $19 million in punitive damages. Before trial, the parties had stipulated the trial court could determine the amount of Brandt fees post-verdict.  The trial court awarded the insured $12,500 in Brandt fees.

The insurer moved for a new trial seeking a reduction in the punitive damages award because it was unconstitutionally excessive. The trial court granted the motion for new trial unless the insured accepted a reduction of punitive damages to $350,000. The trial court did not include Brandt fees in that calculation.

The insured appealed the order granting the new trial. The Court of Appeal affirmed, holding the trial court properly reduced the punitive damages award to a 10-to-1 ratio, even without the inclusion of the $12,500 in Brandt fees. The California Supreme Court granted review and reversed.

The California Supreme Court relied on the United States Supreme Court’s three guideposts that reviewing courts must consider to determine whether an award of punitive damages violates due process rights under the Fourteenth Amendment: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or 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. (See BMW of N. America, Inc. v. Gore (1996) 517 U.S. 559, 568.)

Focusing on the second guidepost, the California Supreme Court noted that “few awards exceeding a single-digit ratio between punitive damages and compensatory damages . . . will satisfy due process.” Gore, 517 U.S. at 425. Ratios of punitive damages to compensatory damages that greatly exceed 9 or 10 to 1 are presumed excessive and therefore unconstitutional. (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1182.)

In reversing the judgment, the California Supreme Court reasoned that disregarding Brandt fees as a necessary component of the insured’s harm “skew[s] the proper calculation of the punitive-compensatory ratio.” The result impairs the reviewing courts’ full consideration of whether the punitive damages award exceeds constitutional limits.

The Court also rejected the insurer’s argument that a trial court’s award of Brandt fees, as opposed to a jury’s verdict, should not be included in the calculation of compensatory damages, overruling Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538.