One day in 1973, 65-year-old Elmer Norman went to his doctor for some hearing tests and a prescription for antibiotics to treat an ear infection. But when Norman submitted the bills to Colonial Penn Franklin, his health insurer, the company denied his $48 claim, arguing, among other things, that the prescription drug he'd received wasn't actually a prescription drug and therefore wasn't covered. Incensed, Norman contacted William Shernoff, the famous California trial attorney who'd won a landmark lawsuit against an insurance company a few years earlier.
Blind in one eye and mostly deaf -- he wore a homemade hearing aid made from big stereo headphones and a microphone connected to a box on his belt -- Norman eventually persuaded Shernoff to take his $48 case. During the litigation, Shernoff discovered that Colonial Penn had duped about 100,000 seniors into believing they were getting a "new and improved plan" when, in fact, it actually cut coverage to save more than $4 million annually. Colonial Penn's treatment of the seniors so outraged the jury that it awarded Norman a jaw-dropping $4.5 million, the company's annual savings, in punitive damages. (The case was settled for somewhat less.)
The Norman case became famous among consumer advocates fighting unscrupulous insurance companies. J. Robert Hunter, a former Texas insurance commissioner and the current director of insurance for the Consumer Federation of America, says Norman's case "did more in one year to reform claims practices than years of regulation." He says that for years afterward, lawyers would turn up claim documents from national insurance companies with notes to adjusters reading, "Handle this one right. It's from California."
Insurance companies, though, have waged an expensive battle ever since to make sure that the Elmer Normans of the world never again see their day in court. They have funded efforts to stack the federal judiciary with such pro-business nominees as Priscilla Owen, who, as a Texas Supreme Court justice, once threw out a jury verdict against an insurance company that had approved a woman's spleen and gallbladder surgery and then refused to pay.
The industry has also spent millions on a massive public-relations campaign against "runaway jury awards" and "greedy trial lawyers" in an effort to pressure states to restrict citizens' rights to sue. In California, insurance companies spent more than $44 million in 2000 to overturn two year-old state laws that allowed a person injured in an auto accident to sue the other (at-fault) driver's insurance company for refusing to settle or lowballing payment on a legitimate claim. Similar campaigns are under way in states like West Virginia, where such laws are still on the books. Meanwhile, the U.S. Chamber of Commerce plans to fork over $40 million this year in lobbying for federal restrictions on citizens' legal remedies. Much of that money comes from insurance companies.
The industry's tactics for pressuring state legislators are as cutthroat as some of its claims handling; in April, AIG Chairman Maurice "Hank" Greenberg, who raised millions for George W. Bush's 2000 presidential campaign, said his firm would stop buying municipal bonds from states that don't restrict citizens' rights to sue. Such strategies have worked. In the past decade, more than 40 states have instituted some kind of limits on citizens' ability to check corporate malfeasance through civil suits. And in April, in State Farm v. Campbell, the U.S. Supreme Court declared a large punitive-damage award unconstitutional in a decision that took language right from the American Insurance Association's amicus curae ("friend of the court") brief. The ruling, which has wide-reaching implications for consumers, stems from a case that demonstrated why such awards are often well deserved.
In 1981, Curtis Campbell caused a car accident that killed one person and disabled another. The injured parties sued Campbell for damages and wrongful death, but repeatedly offered to settle with State Farm for the limit of Campbell's $50,000 auto insurance policy. State Farm, however, forced the case to trial and led Campbell to believe that it would pay for any damages assessed above the limits of his policy. But when the jury awarded the plaintiffs $185,849, an agent from State Farm bluntly told Campbell and his wife, "You may want to put 'for sale' signs on your property to get things moving."
Stunned, Campbell sued the insurance giant for acting in bad faith. During that litigation, which dragged on for years, Campbell's attorneys showed that State Farm's pressure on Campbell to go to trial -- far from being an "honest mistake," as the company argued -- was part of a nationwide policy to meet corporate fiscal goals by capping payouts on claims. Adjusters were even rewarded with bonuses for cheating consumers out of legitimate claims. The tactics were most actively employed against poor racial or ethnic minorities, women and the elderly, whom State Farm believed would be less likely to object or take legal action. State Farm also argued that practices in place in 1981 had been abolished, but Campbell's attorneys proved they were still in use when the case went to trial in 1996.
Campbell's lawyers introduced extensive evidence of the company's fraudulent practices around the country, which included concealing and destroying documents to avoid disclosure of the claims policy and systematically harassing and intimidating opposing claimants, witnesses and attorneys. State Farm used its vast wealth to try to wear out opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges and abusing the motion process. (State Farm's litigation eventually outlived Campbell, who died in 2001 at age 83.)
The company's behavior was so egregious that in 1996, a jury awarded Campbell $145 million in punitive damages, or 0.26 of 1 percent of State Farm's wealth. The Utah Supreme Court -- hardly a bastion of radical liberalism -- upheld the award on the grounds that, because the company's behavior was largely clandestine, it would be punished, at most, in only one out of every 50,000 cases.
Harvey Rosenfield, president of the California-based Foundation for Taxpayer and Consumer Rights, says when he originally read the Utah court's opinion, he thought State Farm would lose its license to practice in several states. Instead, the U.S. Supreme Court overturned the Utah decision, setting guidelines for punitive damages that would be four to 10 times the amount of compensatory damages, or something more closely related to the state's maximum civil penalty for such behavior. In Utah, that figure is only $10,000.
For a company worth $32 billion, a $10,000 award could hardly be considered punitive. "The ability to make the punishment fit the crime is very adversely affected [by this decision]," says Laurence Tribe, the Harvard Law School professor who argued the Campbell case. "There will be no reason for an unscrupulous company to do whatever they want to maximize profits."
Indeed, just as Elmer Norman improved corporate behavior with his lawsuit, reductions in jury verdicts often have the opposite effect. Last December, a Texas court reduced the $32 million award in Melinda Ballard's bad-faith case against Farmers Insurance Group to $4 million. Ballard says insurance companies then started calling policyholders across the state and retracting offers to pay claims, saying, "Sue us." Ballard, who has formed a nonprofit group, Policyholders of America, to lobby for insurance reform, says, "[Insurance companies'] whole purpose in life is to avoid paying legitimate claims. ... They want to be bad out on the playground and not get spanked."
The Supreme Court also ruled in the State Farm case that out-of-state evidence such as that introduced by Campbell should be banned in future trials. And yet only the states are vested with the power to regulate the billion-dollar national industry. Even though companies such as State Farm engage in interstate commerce, Congress exempted them from federal regulation in 1945 in the McCarran-Ferguson Act. The industry is exempt from antitrust regulation and oversight by the Federal Trade Commission, too.
Lawsuits such as Campbell's -- and the threat of large punitive damage awards -- are often the only recourse consumers have, not only to learn about insurance companies' business practices but also to prevent insurance companies from abusing them with abandon. That's why the industry wants to get the bad-faith laws off the books and put the trial lawyers who represent little guys like Elmer Norman out of business. By removing the big stick of punitive damages, the Supreme Court just helped them get a little closer to that goal.