High Court to Rule on High Punitive Awards by Juries

The Supreme Court, in a case that could resolve whether juries may impose heavy punitive damages, agreed Monday to decide whether the constitutional rights of an Orange County-based insurance company were violated by having to pay more than $1 million in punitive damages.

The company was ordered to pay the damages for a fraud perpetrated without its knowledge by one of its agents.

In cases of fraud or other wrongdoing, juries can use a punitive award to punish the wrongdoer in addition to forcing him to pay for actual damages. Though long a part of the American civil justice system, punitive damage verdicts have grown in number and size in the last 15 years. Sometimes, a punitive award is as much as 100 times greater than the actual damages.

Lawyers for manufacturers, insurance companies and now even churches say it is unconstitutional to allow an irate jury to simply select a monetary verdict as a means of punishment. They argue that courts cannot punish someone--whether it be for a parking violation or a murder--without spelling out in law the nature of the crime and the range of possible punishments.

But defenders of the system say large punitive verdicts are the only means to punish and deter big corporations engaged in gross misconduct.

In the past month, two California-based religious groups, the International Society for Krishna Consciousness and the Church of Scientology, have filed appeals at the court challenging multimillion-dollar punitive awards against them.

The Krishnas say their churches will be sold off and their religion destroyed unless the court overturns a $5-million award won by a young Orange County woman who said she was brainwashed and held against her will by church members.

Since 1986, several justices have voiced doubts about the constitutionality of big punitive awards, but the court as a whole has been unable to agree on a basis for imposing limits on them.

The insurance company case granted a review on Monday may give the justices a vehicle for setting nationwide standards for punitive damages. But it could also yield a narrow ruling on whether a company can be punished for the illegal actions of one of its low-level officials.

The case, Pacific Mutual Life Insurance vs. Haslip, 89-1279, will be argued in the fall, with a ruling likely early next year.

Pacific Mutual, based in Newport Beach, sells life insurance nationwide. In 1981, one of its sales agents in Birmingham, Ala., sold a combined life and health insurance policy to employees of the city of Roosevelt, Ala. The health coverage was to be provided by a second company, Union Fidelity.

But the agent simply pocketed the premiums for the health coverage, and Union Fidelity soon canceled the policy. When Cleopatra Haslip, a city employee, was hospitalized for a kidney infection, she was surprised to learn that she had no health insurance. Her bills came to more than $2,500.

She and several other employees then filed a suit against Pacific Mutual and the agent charging them with fraud. When the agent disappeared, the Orange County company was left to defend itself alone.

An Alabama jury ruled for the city employees and awarded them nearly $1.1 million in damages, most of which were punitive.

In its appeals, the company said it did not know of the fraud. It also claimed that the award was “grossly excessive” and violated its rights to due process of law. In September, the Alabama Supreme Court upheld the verdict on a 5-2 vote, ruling that the company should have known of the fraud and was responsible for it. Pacific Mutual then appealed the same issues to the U.S. Supreme Court.

In June, the high court ruled that a $1-million punitive damage award does not violate the 8th Amendment’s ban on “excessive fines (and) cruel and unusual punishment.” But the justices specifically left open whether such an award violates the right to “due process of law” in the 5th and 14th Amendments.

Since then, the justices have dismissed without comment a series of appeals challenging punitive damages on just those grounds, leaving most lawyers entirely puzzled. On Monday, they issued a brief order saying they would review the Pacific Mutual case, but without saying which issues they will consider.

“I’m very surprised. I thought this case was weaker than some of the ones they have turned down,” said Bruce Ennis, a Washington lawyer who filed a brief on behalf of the employees urging that the verdict be upheld.