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PUNITIVE AWARDS COMMON IN FINANCIAL CASES

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A forthcoming study of the frequency and severity of punitive damage awards should bolster civil justice reform efforts, tort reform proponents say.

The survey, undertaken by the Santa Monica, Calif.-based RAND Institute for Civil Justice, found that punitive damages are awarded in only about 4% of civil cases. But data from five of the six jurisdictions studied showed that punitive damages were awarded in 14% of financial injury verdicts, most notably in disputes involving insurance, employment and property.

The study, "Punitive Damages in Financial Injury Jury Verdicts," was funded in part by a grant from the Washington-based American Council of Life Insurance. RAND released an executive summary last week. The complete survey is not expected to be available for several weeks.

RAND's study examined state-wide punitive damage awards during the period 1985-1994 from two states-California and New York-and three metropolitan areas. The metropolitan areas were Cook County, Ill.; Harris County, Texas; and St. Louis. The authors also examined punitive awards made by Alabama juries during 1992-1997 since data for previous years was not available.

Among the main findings:

Although a previous RAND survey covering the 1985-1994 period found that punitive damages were awarded in about 4% of civil cases, the new survey shows they were awarded in 14% of the financial injury cases in the first five jurisdictions studied and 17% to 32% of the Alabama verdicts in the later period. The wide Alabama range is due to the reporting of some awards as "general awards" that do not distinguish what portion, if any, is punitive.

Roughly 50% of all punitive damage verdicts occur in financial injury cases, in which no physical injury occurred.

Punitive damages represent a large percentage of the total damages in financial injury cases. During the period studied, they rose to 60% of total awards from 44%.

The average size of punitive damage awards is increasing. During 1985-1989, the average punitive award for financial injury in the first five jurisdictions was $3.3 million. In 1990-1994, it grew to $7.6 million.

Punitive awards in cases involving the "existence, interpretation or performance of an insurance contract" are much higher than in most other types of financial injury cases. The median punitive damage award in insurance-related cases was $652,000, compared with $250,000 for all financial injury cases.

The study's authors note that "the deterrent and shadow effects of punitive damage awards may be far stronger and, thus, more significant, than the corresponding effects of compensatory awards."

"Because punitive damages are awarded in a fraction of all verdicts, they are less frequent and thus less predictable than compensatory awards.

"And, because punitive damages can be many times the compensatory award (though some states have imposed limits on punitive damages in some types of cases), their size is less predictable."

As a result, it may be harder to develop expectations on both the actions that will result in a punitive award and the amount of such an award, the authors say.

"Critics of the current system, for example, argue that the risk of a very large punitive award sometimes drives defendants to settle cases in which they believe the claim is not meritorious or to settle meritorious claims for far too much," write the authors.

One critic of the civil justice system called the report a demonstration of the "unfairness of the current system."

"My sense is that the report continues to support the notion that we need reform in our civil justice system," said David M. Farmer, senior vp in the Alliance of American Insurers' Washington office.

He said the report shows that punitive damages seem to be "way out of proportion" in financial and business cases in particular.

Victor Schwartz, counsel to the Arlington, Va.-based Product Liability Coordinating Committee and a longtime proponent of uniform product liability standards, said, "Opponents of the product liability bill are going to use it to trivialize punitive awards and punitive damages by saying most of the awards occur in business vs. business."

Reform proponents can show that punitive damage awards have removed good drugs and products from the market, he added. The problem isn't the number of punitive awards, it is the lack of uniform standards for awarding punitive damages, he said.

"When the Supreme Court said punitive damages have run wild in this country, that doesn't mean there's a million of them. It's that they fall with uncertainty," said Mr. Schwartz, referring to the high court's 1996 decision in BMW vs. Gore, which held that punitive damages can be so out of proportion to actual damages as to be unconstitutional (BI, May 27, 1996). The current system for awarding punitive damages is neither certain nor swift, he said.

Peter Kinzler, an independent consultant based in Alexandria, Va., who does work for the ACLI, said the study will further reform.

"In the last Congress, two things troubled Congress in respect to limiting punitive damages," he said. The last Congress was the first to seriously consider capping punitive damages. The second problem was that the information used to promote reform was all anecdotal, he said.

But the Gore decision made the notion of a ratio as "a mainstream concept." The RAND study will fill in "the statistical portion," he said.

But an attorney with a consumer group says the study "is ammunition for us."

"This study underscores what we have been saying all along: If the business community were truly burdened by the cost of punitive damages, they would focus on curbing their own litigation against each other rather than limiting the rights of injured consumers to hold corporate wrongdoers accountable," said Joanne Doroshow, a staff attorney with Public Citizen in Washington.

For more information, contact RAND Distribution Services at 310-451-7002.