California Supreme Court Clarifies Attorneys’ Fees And Punitive Damages In An Insurance Bad Faith Action

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Because of the unique nature of an insurance contract, under California law, the unreasonable delay or denial of policy benefits gives rise to a tort cause of action for insurance bad faith.  A tort claim for insurance bad faith, as opposed to an ordinary breach of contract claim, allows for extra-contractual damages, including attorney’s fees and punitive damages.

Punitive damages, under the Due Process Clause of Fourteenth Amendment to the United States Constitution, cannot be “grossly excessive.”  (BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 568.)  Thus, under federal law, an award of punitive damages must be “both reasonable and proportionate” to the harm caused.  (State Farm Mut. Automobile Ins. Co. v. Campbell(2003) 538 U.S. 408, 426.)  Courts have interpreted that to mean that, absent unique circumstances, punitive damages cannot exceed compensatory damages by more than 9 to 1 ratio.  (Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1182.)

An award of attorney’s fees for the amount the insured was required to expend to obtain policy benefits is recoverable in an insurance bad faith case under California law.  (Brandt v. Superior Court (1985) 37 Cal.3d 813, 817.) This is based on the rationale that, if it is the “insurer’s tortious conduct” that forces the insured to hire a lawyer to obtain policy benefits, “the insurer should be liable . . . for that expense.”  (Id. at 817.)  A claim for attorney fees in an insurance bad faith case are often referred to as “Brandt fees,” after the case establishing the right to recover such fees in a bad faith case.  Although a jury can decide the amount of Brandtfees, because of complications regarding presenting evidence of attorney’s fees to the jury, parties often agree to have the Court decide the amount of Brandt fees after the jury decides the issue of bad faith.

The question arises, however, whether Brandt fees can be included in the compensatory damages used to calculate the appropriate ratio for punitive damages, where the Court determines the amount after a jury verdict on punitive damages.  On June 9, 2016, in Nickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal.4th 363, the California Supreme Court answered that question.  It held that “Brandt fees may be included” when calculating the ratio of punitive damage to compensatory damages, regardless of the timing of the award ofBrandt fees of whether the Court or jury made the decision.  (Id. at 368.)

Nickerson noted that “Brandt fees ordinarily qualify as compensatory damages” for purposes of the punitive damage ratio.  (Id. at 373.)  Nickerson held that the proper ratio between compensatory and punitive damages is a “question aimed at reviewing courts, rather than juries.”  (Id. at 375.)  Thus, Nickerson held that there was “no reason to exclude Brandt fees” from the calculation of the proper ratio of punitive damages, even where Brandt fees are awarded by the Court after the jury has rendered a bad faith verdict.  (Id. 376.)

Nickerson is an important decision clarifying that Brandt fees should always be included in calculating the proper ratio between compensatory and punitive damages in a bad faith action.  Insureds pursuing a bad faith cause of action can now rest assured that they will not lose the ability to use the amount of Brandt fees to support a punitive damage award simply because the parties agreed to have the judge, rather than the jury, decide the amount.