When Punitive Damages Apply in Insurance Bad Faith

Understanding Punitive Damages in Bad Faith Cases

Punitive damages (also called "exemplary damages") serve a different purpose than compensatory damages. While compensatory damages make you whole for your losses, punitive damages punish the insurer for outrageous conduct and deter similar behavior in the future.

In insurance bad faith cases, punitive damages are available when the insurer's conduct goes beyond mere negligence or even ordinary bad faith. Courts require evidence of something more egregious: malice, fraud, oppression, or a conscious disregard for your rights as a policyholder.

The Legal Standard for Punitive Damages

Most states require "clear and convincing evidence" (a higher standard than the typical "preponderance of the evidence") of at least one of the following:

• Malice: Conduct intended to cause injury or despicable conduct carried out with a willful and conscious disregard of others' rights
• Oppression: Despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights
• Fraud: Intentional misrepresentation, deceit, or concealment of material facts known to the defendant

When Punitive Damages Are Most Likely to Apply

1. Pattern of Similar Conduct

Courts are more likely to award punitive damages when the insurer has a documented pattern of similar bad faith conduct toward other policyholders. Evidence that the company systematically denies valid claims or uses delay tactics across multiple cases strengthens the argument for punishment.

2. Knowing Violation of Regulations

When an insurer knowingly violates insurance regulations or internal claims handling guidelines, punitive damages become more likely. This is particularly true when the violation is documented in internal communications or when supervisors override adjuster recommendations.

3. Financial Pressure on Policyholders

Insurers that intentionally delay or deny claims to pressure financially vulnerable policyholders into accepting lowball settlements face increased punitive exposure. This "squeeze play" tactic particularly offends courts.

4. Destruction or Concealment of Evidence

If the insurer destroys claim files, conceals evidence, or instructs employees to avoid creating documentation, punitive damages are highly likely. This conduct shows consciousness of guilt.

5. Training Programs Encouraging Bad Faith

Evidence that the company trained claims handlers to deny or undervalue claims, or that compensation structures rewarded unfair claims practices, can support substantial punitive awards.

Constitutional Limits on Punitive Damages

The U.S. Supreme Court has established constitutional guardrails on punitive damage awards:

The BMW v. Gore Guideposts

In BMW of North America v. Gore (1996) and State Farm v. Campbell (2003), the Supreme Court established three factors courts must consider:

1. Degree of reprehensibility: How egregious was the defendant's conduct?
2. Ratio to compensatory damages: Is the punitive award proportional to the actual harm?
3. Comparable civil penalties: How does the award compare to penalties for similar misconduct?

The Single-Digit Multiplier "Rule"

While not a strict rule, the Supreme Court has suggested that punitive damages exceeding a single-digit ratio to compensatory damages (9:1 or less) raise due process concerns. However, courts may exceed this ratio when:

• The conduct was particularly egregious
• Compensatory damages are low but the conduct was highly reprehensible
• The harm is hard to detect or the defendant has a significant ability to pay

Building Your Punitive Damages Case

Evidence to Preserve and Gather

• All communications with the insurer (letters, emails, recorded calls)
• Your complete claim file (request it under your state's law)
• Documentation of how the delay or denial affected you financially and emotionally
• Evidence of the insurer's treatment of similar claims
• Information about the insurer's financial condition

Discovery Targets in Litigation

If your case goes to litigation, punitive damages cases typically require extensive discovery focused on:

• Claims handling manuals and guidelines
• Training materials for claims adjusters
• Performance metrics and compensation structures
• Internal audit reports on claims practices
• Regulatory examination reports
• Similar complaints or lawsuits against the insurer
• Internal communications about your specific claim

Notable Punitive Damage Awards in Bad Faith Cases

While every case is different, these examples illustrate when courts have found punitive damages appropriate:

• Campbell v. State Farm (Utah): $145 million punitive award (later reduced) where insurer refused to settle within policy limits, then declined to appeal the excess verdict, leaving the insured exposed
• Hangarter v. Provident Life (9th Cir.): $5 million punitive damages for disability insurer's practice of targeting claims for termination to improve profitability
• Egan v. Mutual of Omaha (California): Established that insurers can be liable for punitive damages when they deny claims without proper investigation

These cases share common themes: systematic misconduct, knowing violations of duties, and corporate policies that prioritized profits over policyholders.