There’s that commercial with the earnest, wise and sentorian guy talking about all the great things they do, ending with the intonation, “That’s Allstate’s stand.”  A new American Association of Justice study noted here names Allstate the worst insurer.

Interestingly, Allstate’s CEO’s 2007 compensation topped $10 million for the year.  That’s a lot of premium money. More to the point, it’s fair to say that Allstate has some…uh…history of being naughty.

My own experience is that some insurers are worse than others. While not all are bad news, many give injured consumers and policyholders the runaround when people make claims for their harms and losses. It’s common to hear someone in my office express surprise when Allstate or one of the other carriers fails to make good on its end of the insurance contract by, for example, failing to pay medical expenses incurred by the injured policyholder.

That’s particularly outrageous because the policyholder did what they were supposed to when they paid for the coverage. And then they get stiffed or hard-timed by Allstate. This is what we in the trenches refer to as, “Allstate’s stand.”

David Sugerman

It may have been inevitable. Late last week, the Oregon Supreme Court released its opinion in Goddard v. Farmers Insurance. Oregon court watchers have been waiting for this opinion. It addressed whether under federal due process restrictions, a punitive damage award against Farmers Insurance was too high.

It’s a long opinion. Here’s the link: www.publications.ojd.state.or.us/S053405.htm

It’s a complicated case that spans more than 20 years. My friend and colleague, Bill Barton, represented the estate in this case that featured more twists and turns than any in recent memory. The short version is that a drunk driver, Mr. Munson, killed Marc Goddard back in 1987. Farmers insured the drunken Mr. Munson. When the Goddard family sued, Farmers had the opportunity to pay its policy to protect Mr. Munson, but refused to do so.

The underlying automobile case went to trial, and the jury awarded substantially more than the $100,000 policy limits that were in place to protect Mr. Munson. That was bad.
That failure exposed Mr. Munson to profound problems because the Goddard family could collect more the excess from Mr. Munson. Farmers’ refusal to settle created a bad faith claim. The Goddard estate pursued that claim on assignment, standing in Mr. Munson’s shoes against Farmers. And that bad faith claim resulted in a multi-million dollar punitive damage award. Ain’t that a mouthful?

Anyway, all sorts of bad stuff came out in the trial against Farmers about how they had multiple opportunities to protect their insured, Mr. Munson, by paying the policy limits, and they refused. The jury socked it to Farmers. Farmers appealed claiming that the multi-million dollar punitive damage award violated Farmers’ federal constitutional due process rights.

With the remaking of U.S. Supreme Court, the due process rights of corporate interests have ascended to a position of prominence. The linchpin of the corporate due process analysis rests upon the bizarre notion that when a corporation engages in wrongdoing, it is entitled to know how much financial exposure its misconduct creates. It has become one of those axioms repeated so often by the U.S. Supreme Court and conservative commentators that no one stops to examine how the emperor has no clothes.

Because it’s problematic, to be kind. What the U.S. Supreme Court has decreed is that every corporation should be able to perform a cost-benefit analysis on misconduct. For those old enough to remember, this sounds vaguely familiar, doesn’t it? As in the Ford Pinto–one of the landmark cases of U.S. product safety litigation. In that case, Ford executives chose to not recall the exploding Pinto to modify its dangerous gas tank because–they reasoned–they would lose more money by the recall and retrofit campaign than they would if they had to defend an expected number of death claims from fiery explosions.

Bad conduct by any measure. And the jury that heard that evidence used a multi million dollar punitive damage award to teach the people at Ford that they can’t choose profit over safety.

As the Court in Goddard pointed out, they were applying federal constitutional law as they distilled it from U.S. Supreme Court opinions. So I suppose it’s important to clarify that the problems emanate from the D.C. Supremes, as opposed to Salem. Cold comfort, unfortunately.

And with all that lengthy background (sorry!), it’s now easy to explain how this hurts consumers. The bright-line punitive damage limit gives every corporate wrongdoer the ability to do math to figure out whether or not they will be penalized for misconduct. This is not exactly the best way to make sure that corporations act fairly. Instead, it encourages misconduct with limits.

The only saving grace of Goddard is that the Oregon court reserved an exception for extreme misconduct, which can still lead to higher punitive damages. They had to say that, actually, as they recently decided Williams v. Philip Morris, affirming a substantial punitive damage award for the tobacco giant’s outrageous misconduct. Still, it’s easy to see the future here. Short of profound fraud that causes death, a corporation’s misconduct will expose it to punitive damages of no more than four times the amount of actual damages awarded to an injured person.

So corporate wrongdoers, “Come on down!” Just crank out the numbers, and you’ll always know how bad you can be.

David F. Sugerman