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MONTGOMERY, Ala. -- Juries cannot award punitive damages unless they also award compensatory damages, the Alabama Supreme Court has ruled.
The decision should significantly benefit insurers and business in Alabama and help refocus trials in the state on the issue of damage rather than the alleged reprehensible behavior of the defendant, a defense attorney said.
But the ruling still will take only a slight edge off Alabama's reputation as a plaintiff-friendly state, a product liability reform lawyer said.
The case involved five kindergarten employees who sued a life insurer, alleging one of its agents had misrepresented a life insurance plan he sold them.
The employees of Bay Christian Academy in Fairhope, Ala., alleged that in 1991 the agent for Life Insurance Co. of Georgia told them he would enroll them in a plan where their pretax contributions would be used to establish a "savings plan" or "retirement program," court papers say.
In fact, the agent sold the employees universal life insurance policies. The employees alleged that the insurance policy could subject them to potential tax liabilities they would not have incurred under a cafeteria savings plan they had thought they were joining.
Life of Georgia subsequently set up a $400,000 trust to meet any increased tax liabilities the employees would face. Life of Georgia argued that because it had set up the trust, the employees had not suffered any damage.
At trial, the jury awarded no compensatory damages but did award $1 million in punitive damages against Life of Georgia.
In considering the case, the Supreme Court of Alabama said the courts in the state had held widely differing views on whether punitive damages could be awarded in the absence of compensatory damages or significant compensatory damages.
In one case, BMW of North America Inc. vs. Gore, a jury awarded $4,000 in compensatory damages and $4 million in punitive damages. The Alabama court reduced the punitive damages to $2 million. But on appeal, the U.S. Supreme Court ruled the award excessive (BI, May 27, 1996).
The Alabama court noted the BMW decision in the Life of Georgia case: "We recognize that closer scrutiny of the relationship between compensatory damages and punitive damages is necessary. . . . We now require, therefore, that a jury's verdict specifically award either compensatory damages or nominal damages in order for an award of punitive damages to be upheld."
The court sent the Life of Georgia case back to the lower court for retrial.
The decision will benefit businesses and insurers in Alabama, said Charles Kelley, a partner at Carr, Allison, Pugh, Howard, Oliver & Sisson in Montgomery and a member of the Defense Research Institute.
"Plaintiffs in Alabama had shifted the focus of trials from the issue of whether there was damage to the alleged reprehensibility of the defendant. This decision brings back into focus the fact that the plaintiff has to prove that there is some damage," he said.
It will particularly benefit companies that recognize they made an error and then try to rectify it, Mr. Kelley said.
But the decision does not go far enough, said Victor Schwartz, a partner at Crowell & Moring in Washington.
"It's good to see the court coming more into the mainstream of American law with respect to product liability, but two major issues still remain -- will Alabama courts exercise great restrictions on when punishment is approved, and will they exercise restraints on the amount of the awards," he said.
Life Insurance Co. of Georgia vs. Janelle S. Smith, Supreme Court of Alabama, CV-94-373.