Supreme Court of California Rules That Post-Verdict Award of Attorneys’ Fees to Insured May Be Included When Calculating Punitive-Compensatory Damages Ratio

The Supreme Court of California has ruled that a trial court’s post-verdict award of attorneys’ fees to an insured may be included in the amount of compensatory damages awarded to the insured for purposes of determining the punitive-compensatory damages ratio.

The Case

A man who spent weeks confined to a hospital bed at the Department of Veterans Affairs hospital in Long Beach, California, sought benefits from Stonebridge Life Insurance Company under an indemnity benefit policy that promised to pay him $350 per day for each day he was confined in a hospital for the necessary care and treatment of a covered injury.

Stonebridge determined that the insured’s hospitalization was “medically necessary” only for certain of the days he had been hospitalized, and it sent him a check for $6,450.

The insured sued, alleging that Stonebridge had breached the insurance contract by failing to pay him benefits for the full 109 days of his hospital stay and that Stonebridge had breached the implied covenant of good faith and fair dealing by acting unreasonably and in bad faith in denying him his full policy benefits.

The parties stipulated before trial that if the insured succeeded on his complaint, the trial court could determine the amount of attorneys’ fees to which he was entitled under California law as compensation for having to retain counsel to obtain the policy benefits.

At the close of the insured’s case, the trial court granted his motion for a directed verdict on the breach of contract cause of action and awarded him $31,500 in unpaid policy benefits. With respect to the bad faith cause of action, the jury returned a special verdict finding that Stonebridge’s failure to pay policy benefits had been unreasonable, and it awarded the insured $35,000 in damages for emotional distress. The jury also found that Stonebridge had “engage[d] in the conduct with fraud” and awarded $19 million in punitive damages.

After the jury had rendered its verdict, the parties stipulated that the amount of attorneys’ fees to which the insured was entitled was $12,500, and the trial court awarded that amount.

The trial court determined that it had to reduce the punitive damages award to a ratio of punitive to compensatory damages of 10 to one. In calculating the permissible amount of punitive damages, the court considered only the $35,000 the jury had awarded in compensatory damages for emotional distress for Stonebridge’s tortious breach of the implied covenant of good faith and fair dealing; it did not include the $12,500 in attorneys’ fees. Therefore, it granted Stonebridge a new trial unless the insured consented to a reduction of the punitive damages award to $350,000.

The insured rejected the reduction in punitive damages and appealed. The court of appeal affirmed, rejecting the insured’s argument that the trial court should have taken into account the $12,500 in attorneys’ fees when calculating the 10 to one punitive to compensatory damages ratio.

The case reached the California Supreme Court.

The California Supreme Court’s Decision

The court reversed, ruling that the attorneys’ fees awarded by the trial court after the jury had rendered its verdict could properly be included as compensatory damages for purposes of determining the punitive to compensatory damages ratio.

In its decision, the court explained that if the attorneys’ fees had been awarded by the jury, they ordinarily would have qualified as compensatory damages for purposes of determining the punitive-compensatory damages ratio.

The court then rejected Stonebridge’s contention that because the trial court had determined the amount of attorneys’ fees after the jury already had rendered its punitive damages verdict, the fees could not be considered in calculating the punitive-compensatory ratio. It said that there was “no apparent reason” why a court could not consider a post-verdict compensatory damages award, pursuant to the parties’ stipulation, in its calculus. It concluded that, on the contrary, to exclude the fees from consideration “would mean overlooking a substantial and mutually acknowledged component of the insured’s harm.”

The case is Nickerson v. Stonebridge Life Ins. Co., No. S213873 (Cal. June 9, 2016).