WASHINGTON--The U.S. Supreme Court's ruling that punitive damages against Exxon Shipping Co. cannot exceed compensatory damages stemming from the grounding of the Exxon Valdez nearly 20 years ago provides clarity to marine insurers and may shape potential lower court rulings, legal experts say.

That's true even though the 5-3 decision applied only to punitive damages levied under maritime law. Whenever the Supreme Court addresses the issue of punitive damages, or any other liability issue, state courts often follow its reasoning, even if the decision does not apply to state law, according to legal experts.

The case--Exxon Shipping Co. et al. vs. Grant Baker et al.--stemmed from the damage caused by the March 1989 oil spill in Alaska's Prince William Sound when the Exxon Valdez ran aground.

After years of litigation, the 9th U.S. Circuit Court of Appeals said Exxon should pay $2.5 billion in punitive damages. Exxon appealed the verdict using three main arguments: that maritime law doesn't allow corporate liability for punitive damages caused by its managerial agents, in this case Capt. Joseph Hazelwood; that the federal Clean Water Act pre-empts punitive damages; and that the punitive damage award was excessive under maritime law.

The high court split on the first issue--thus letting the lower court ruling stand, rejected the second argument but accepted the third, and, in a vote in which Associate Justice Samuel Alito look no part, agreed that the damages were excessive and reduced the punitive award to $507.5 million, the amount of compensatory damages.

Writing for the majority, Associate Justice David Souter noted that, while punitive damages in most cases are smaller than the underlying compensatory damages, the real problem facing courts is the unpredictability of punitive damage awards. Courts are concerned with fairness as consistency and the wide range of punitive damage awards could be unacceptable, he wrote.

"Given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases," he wrote.

Insurance industry observers hailed the ruling.

"The ocean marine insurance companies were looking for a clear standard for punitive damage awards in order to efficiently and effectively underwrite liability coverages for maritime parties," said James M. Craig, president of the American Institute of Marine Underwriters in New York, which filed an amicus brief in the case. "AIMU's brief pointed out that insurers themselves are subject to claims for punitive damages and therefore had an interest in a clear rule," he said.

"I think the key thing to take away from it from the U.S. marine insurance industry perspective is that after this case, punitive damages in the maritime context will be limited to the amount of compensatory damages," said Joseph Grasso, a partner in Wiggin & Dana L.L.P.'s Philadelphia office who prepared AIMU's brief while at another law firm. "That certainly gives the U.S. marine insurance industry more of the certainty they we concerned about."

"I think it's pretty important for the insurance industry and for corporate defendants, but perhaps particularly for the insurance industry," said Thomas Brunner, a partner and head of the insurance practice at Wiley Rein L.L.P. in Washington. "That's because it tends to increase the predictability of punitive damage awards and that's always been an important concern to insurers. It simply applies to maritime law on the one hand, but on the other hand it's the first chance the Supreme Court has had to explain what it thinks is appropriate as a matter of common law rather than permissible as a matter of constitutional law."

In this case, the high court "was actually acting like a state Supreme Court," said Victor Schwartz, general counsel of the American Tort Reform Assn. in Washington. "State Supreme Courts have supremacy over shaping the common law of torts, and the (U.S.) Supreme Court has supremacy to shape the common law of admiralty. So they're acting as a common law court shaping the common law.

"The ruling is only binding on federal courts deciding admiralty cases. But, at least in my view, it could be persuasive to some state courts in shaping their common law of product liability or other tort law because Justice Souter very perceptively addressed an issue which is of concern to the state courts, and that is the problem of the so-called outlier verdict," Mr. Schwartz said.

Mr. Schwartz noted that some state courts have followed the Supreme Court's lead in setting guidelines for expert scientific testimony under the high court's Daubert vs. Merrell Dow Pharmaceuticals Inc. ruling, even though the high court's decision applied only to federal courts.

"I believe that will happen here because Justice Souter's opinion is an extremely well-reasoned opinion," he said.

"It will be very persuasive to many lower courts in other areas beyond maritime law," agreed Curt Cutting, partner at Horvitz & Levy L.L.P. in Los Angeles. "Any Supreme Court opinion is something lower courts are going to take seriously. It's more than that--the reasoning of the court's opinion is not based on anything particular to maritime law. The court has expressed a concern about unfairness that rises when you have unpredictable punitive damage awards, and that's something that is an issue in any area of the law where punitive damages are permitted."

"That analysis right there can be exported to other contexts," said Amar Sarwal, general litigation counsel for the U.S. Chamber of Commerce. "We can go to state courts" and say they should apply the same approach, he said.

An attorney who prepared a brief opposing Exxon's stance disagreed.

"Basically, we're actually kind of happy about the case. It really doesn't have much application beyond maritime cases," said Jeffrey Robert White, senior amicus counsel for the Center for Constitutional Litigation in Washington. He said the court left the original 9th Circuit ruling alone that punitive damages applied in maritime law and said that the Clean Water Act did not pre-empt punitive damages. He added that the court said this ratio applied to maritime cases.

"That really doesn't spill over to other cases," he said.

Exxon Shipping Co. et al. vs. Grant Baker et al. U.S. Supreme Court. No. 07-219; June 25, 2008.