Amicus Curiae Brief — Aetna Life Insurance v. Lavoie

Supreme Court, U.S,

FILED

AUG 2 1985

No. 84-1601

JOSEPH F. SPANIOZ:

‘/ /

IN THE CLERK _

Supreme Court of the United States

OcTOBER TERM, 1984

AETNA LIFE INSURANCE CoO.,

Appellant,

V.

MARGARET W. LAVOIE AND ROGER J. LAVOE, SrR.,

Appellees.

On Appeal from the Supreme Court of Alabama

BRIEF AMICI CURIAE FOR AMERICAN COUNCIL OF

LIFE INSURANCE AND HEALTH INSURANCE

ASSOCIATION OF AMERICA IN SUPPORT OF

APPELLANT

Of Counsel:

JACK H. BLAINE ERWIN N. GRISWOLD

Vice President, State Relations, (Counsel of Record)

and General Counsel THOMAS F. CULLEN, JR.

EDWARD J. ZIMMERMAN PATRICIA A. DUNN

Senior Associate General Counsel Jones, Day, REAVIS & POGUE

AMERICAN COUNCIL OF LIFE 655 15th Street, N.W.

INSURANCE Washington, D.C. 20005-5701

1850 K Street, N.W. (202 ) 879-3939

Washington, D.C. 20006-2284

(202) 862-4000 Counsel for Amici

Jor W. PEEL

Vice President en

General Counsel

JOHN P. DINEEN

Assistant General Counsel

HEALTH INSURANCE ASSOCIATION

OF A\MERICA

919 Third Avenue

28th Floor

New York, New York 10022

(212) 486-5578

BEST AVAILABLE COPY

I.

II.

i

TABLE OF CONTENTS

THE CREATION OF A NEW TORT CAUSE

OF ACTION RETROACTIVELY APPLI-

CABLE TO EXISTING CONTRACTS CON-

STITUTES AN IMPAIRMENT OF CON-

TRACTUAL OBLIGATIONS IN _ CON-

TRAVENTION OF THE CONTRACT

THE DECISION OF THE SUPREME COURT

OF ALABAMA UPHOLDING MASSIVE

PUNITIVE DAMAGES SHOULD NOT

STAND UNDER DUE PROCESS OR THE

EIGHTH AMENDMENT .............c..c-ccsecccrscssceeceess

A. The Assessment of Punitive Damages

Against Appellant is Violative of Due

B. The Decision Below Imposes an Exces-

sive Fine in Violation of the Eighth

a cecssintncsnennibigienineccneeieiteniadsiediaiitiades

ETT cxicnennicessinnoncsnitnnsiarssidtiansniciibnsiuibilnniinaines

11

11

:s

TABLE OF AUTHORITIES

CASES:

Airco Inc. v. Simmons First National Bank, 276 Ark.

486. 638 S.W.2d 660 ( 1982 ) ........eccceceeeeteceeneeeeeeees

Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,

reh’g denied, 439 U.S. 886 ( 1978) ..............ccecceeseeeees

American Pioneer Life Insurance Co. v. Sandlin, No.

82-1063 ( Ala. April 12, 1985) Sesiiciiiaaidimeeanes

Arizona Governing Committee v. Norris, 463 U.S.

ce

Bell v. Wolfish, 441 U.S. 520 (1979) .........c.csessecoesneeeees

Bridges v. California, 314 U.S. 252 (1941) ..............00.

Campus Sweater and Sports Wear Co. v. M. B. Kahn

Construction Co., 515 F. Supp. 64 (D.S.C. 1979),

aff'd without opinion, 644 F.2d 877 ( 4th Cir. 1981)

Chavers v. National Security Fire & Casualty Co., 405

So.2d 1 (Ala. 1981). aioadilidiiiaiaetaneettcennasee

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) ............

Cipriano v. City of Houma, 395 U.S. 701 (1969).........

City of Phoenix v. Kolodzieyski, 399 U.S. 204 (1970)...

C vker v. Georgia, 433 U.S. 584 (1977) .........cccceceeeeeeeee

Dey v. Woodworth, 13 Howard 363 (1851) .................

Dempsey v. Auto Owners Insurance Co., 717 F.2d 556

I TE sictinternegttentntenanncmnatnatinnneescateencscsstersees

Dorsey v. Honda Motor Co., 655 F.2d 650 (Sth Cir.

1981), ified on other grounds, 670 F.2d 21 (Sth

Cir. ), cert. ied, 459 U.S. 880 ( 1982) ...................

Egan v. Mutual of Omaha, 24 Cal. 3d 809, 157 Cal.

a. 482, 598 P.2d 452 (1979), appeal dismissed,

Ee

Enmund v. Florida, 458 U.S. 782 (1982) ..........-:s0000

First Bank (N.A.)—Billings v. Transamerica Insur-

ance Co., 679 P.2d 1217 ( Mont. 1984) ....................

Ford Motor Company v. Stubblefield, 319 S.E.2d 460

| EE eT

17

12

Frazier v. Metropolitan Life Insurance Co., No.

B004240 (Cal. App. June 10, 1985) 0.00...

Geohagan v. General Motors Corp., 291 Ala. 167, 279

I i et eccrine

Gelpcke v. City of Dubuque, | Wall. 175 ( 1863)..........

Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974) .......

Gregg v. Georgia, 428 U.S. 153, reh’g denied, 429 U.S.

Be aE saccindisistenitlintindtadicicieniiciiandiintienituieectinineseees

Grimshaw v. Ford Motor Co., 119 Cal. App. 3d 757,

| Ee a

Gulf Atlantic Life Insurance Co. v. Barnes, 405 So.2d

EL. A ea

Hansen v. Johns-Manville Products Corp., 734 F.2d

aaa (Sth Cir.), cert. denied, 105 S.Ct. 1749

|, OS a eae

Hasson v. Ford Motor Company, 32 Cal.3d 388, 185

Cal. Rptr. 654, 650 P.2d 1171 (1982), cert. dis-

I Ge eae COR CBD D ccccececcscscescccccnsccscecsssess

Hill v. Stone, 421 U.S. 289, reh’g denied, 422 US.

ee ilithininsiiddisibenladvitaniinnsiihinmenennninebenssinneeeenesses

International Brotherhood of Electrical Workers v.

ee I cirsistnrinenisetaitinidesensamneny

Jackson v. Johns-Manville Sales Corp., 727 F.2d 506

IIE id itincitecrietisestninitcaiineniaiintidindncebatenennnenn

Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963)..

Lavoie v. Aetna Life & Casualty Co., 374 So.2d 310

FR RES OREN ERIE SERS aC OUR

Lavoie v. Aetna Life & Casualty Co., 405 So.2d 17

I FSS RL a

Lemon v. Kurtzman, 411 U.S. 192 (1973) ......0.....0.....

Maxey v. Freightliner Corporation, 450 F.Supp. 955

(N.D. Tex. 1978), aff'd, 623 F.2d 395 (5th Cir.

1980), vacated and remanded upon rehearing, 665

F.2d 1367 (Sth Cir. 1982), vacated in part and

aff'd in part, 722 F.2d 1238 ( 5th Cir. 1984).............

Moore v. American United Life Insurance Co., 150

Cal. App.3d 610, 197 Cal. Rptr. 878 ( 1984)............

10

15,18

13,22,23

12

4

17

12

16

13

iV

Page

National Savings Life Insurance Co. v. Dutton, 419

Bs FR Ds ene 4

National Security Fire & Casualty Co. v. Bowen, 417

Ns a tectitinnideenineercnaniniiammene 4

Nationwide Mutual Insurance Co. v. Clay, Nos. 82-

536, 82-917 ( Ala. Feb. 8, 1985) .............cccccccescsecseees 13

Neal v. Farmers Insurance Exchange, 2\ Cal.3d 910,

148 Cal. Rptr. 389, 582 P.2d 980 ( 1978)................. 14

New York Times Co. v. Sullivan, 376 U.S. 254 ( 1964) ll

O’Gilvie v. International Playtex, Inc., No. 83-1846-K

Ce SD TEE Ge TIP cendenvenntecintiienebtenitienesiginns 12

Palmer v. A. H. Robins Co., 684 P.2d 187 (Colo.

Pore ichiahihiciicanceidenditaincndicittniestaininleibbinnigennicinatonsitannnmseee 12

Pistorius v. Prudential Insurance Co., 123 Cal.

App.3d 541, 176 Cal. Rptr. 660 (1981) ................... 13

Phillips Petroleum Co. v. Shutts, No. 84-233 (June

Bis: PEP ienincinninecranritneenneptiapinnrienemetgatnmene 10

San Jose Production Credit Association v. Old Repub-

lic Life Insurance Co., 723 F.2d 700 (9th Cir.

Pave issesdindiiibdarsinsibdetnestianinedininitnininbiaiialeiatiiliidebdineiansineedcien 13

Sexton v. Liberty National Life Insurance Co., 405

tk | he eT nee a ee 4

Smith v. Wade, 461 U.S. 30 (1983) ...........ccccceeeeeeeeeees ea .

Solem v. Helm, 463 U.S. 277 (1983) ...........eccccceeeeceeeees 6,21,23

Sparks v. Republic National Life Ins. Co., 132 Ariz.

529, 647 P.2d 1127, cert. denied, 459 U.S. 1070

(1982) snidaepnatiiniialidetpanasdiiutst piiadibatiitieianees 13

Sturm, Ruger & Co. v. Day, 594 P.2d 38 (Alaska

1979), cert. denied, 454 U.S. 894 (1981) ................. 16

The Sunday Times v. The United Kin ,2 E. Hu.

R. R. 245 (European Court of Human Rights !

Oe sitar lace tiatetatinasiilciaiiaaanaaegen ll

T.D.S. Inc. v. Shelby Mutual Insurance Co., 760 F.2d

Se ee te BE cttininntensiniminniinnpaiteemenie 13

Tibbs v. Great American Insurance Co., 755 F.2d

ee ty IED eit tcchseminintstencsaninnitniamsianeancennin 13

Tidal Oil Company v. Flanagan, 263 U.S. 444 (1924). 5,10,11

Trop. v. Dulles, 356 U.S. 86 (1958) ............cccceeeeeeeeeeee 14,22

United States v. United Mine Workers, 330 U.S. 258

UT UTE Wiadesinnnssccisudesbiileddacnsciniciedaannsdlidlcidssidiindiesbiacniiiidicliuandaieniil 24

—

United States v. Ward, 448 U.S. 242, reh’g denied,

ee i cihictieraciinciematinicannintiionaiiniaiaianstes

United States Trust Co. of New York v. New Jersey,

8 SET RET eI Hee ene

Weems v. United States, 217 U.S. 349 (1910).............

Wood v. Citronelle-Mobile Gathering System Com-

pany, 409 F.2d 367 (Sth Cir. 1968)... eee

STATUTES:

Ala. Code § 27-1 through 27-40 ( 1975)...............

Se Oe ee 0 BF Picccrencetcieencsensnciennccninsee

Mont. Code Ann. § 27-1-221 ( 1983)............0000....

OTHER AUTHORITIES:

Bernstein, “Dread Singularities” (Book Re-

ge ae ae York Times Book Review, April

iNT scesiaesieiiniibicbinbemeadtiadadiidideatiddlentesionttdalieniagssnees

Ellis, Fairness and Efficiency in the Law of

— Damages, 56 So. Cal. L. Rev. 1

er aarhasdieeietnneiaenneihbniabigittht haa ttatinat iainstanasstanenenenene

Grass, The Penal Dimensions of Punitive Dam-

ages, 12 Hastings Const. L.Q. 241 ( 1985)........

Granucci, “Nor Cruel and Unusual Punishment

Inflicted”: The Original Meaning, 57 Cal. L.

ne cies

J. Holt, Magna Carta (1965) .0..........c.cccccccesceceseees

Myers and Barrus, Punitive Damages in Product

Liability Cases: A Survey, 52 Ins. Counsel J.

I iiceiniiiinntiedecshieiintiociiclidneniincintidesne

Nelson, Punishment for Profit: An Examination

of the Punitive Damage Award in Strict Liabil-

8 _) IEEE a

R. Perry, Sources of Our Liberties (1959)............

Rabin, Dealing with Disasters: Some Thoughts

on the Adequacy of the Legal System, 30 Stan.

aI OTT iinseeniientiinsinineesnenediiinaiedsieimnouesen

Wheeler, The Constitutional Case for Reforming

Punitive Damages, 69 Va. L. Rev. 269 (1983).

20,21

17

15

IN THE

Supreme Court of the United States

OcTOBER TERM, 1984

No. 84-1601

AETNA LIFE INSURANCE CoO.,

Appellant,

Vv.

MARGARET W. LAVOIE AND ROGER J. Lavoie, Sr.,

Appellees.

On Appeal from the Supreme Court of Alabama

BRIEF AMICI CURIAE FOR AMERICAN COUNCIL OF

LIFE INSURANCE AND HEALTH INSURANCE

ASSOCIATION OF AMERICA IN SUPPORT OF

APPELLANT

INTERESTS OF THE AMICI '

The American Council of Life Insurance (“Council”) is

the largest life insurance trade association in the United States,

representing the interests of 627 member life insurance com-

panies including most of the major life insurers in the country.

The Council’s members currently hold ninety-five percent of the

life insurance in force in legal reserve life insurance companies

in the United States. The Health Insurance Association of

America (“HIAA”) represents the interests of 327 member

companies which write over eighty-five percent of the health

1 Consent from counsel for both parties has been filed with the Clerk of

this Court.

2

insurance written by insurance companies in the United States,

and the combined memberships of the HIAA and the Council

represent over ninety percent of the health insurance written by

insurance companies in the United States.

The opinion of the Supreme Court of Alabama below is

important to members of the Council and the HIAA because it

enlarges the contract liability of insurers by exposing them to

open-ended punitive damages. A new tort cause of action has

been grafted onto Alabama insurance contracts which greatly

enhances the legal and actuarial liabilities of the members of

the Council and the HIAA. As with any form of insurance, a

predictable allocation of risks and costs, based upon historical

patterns of claim payments, is essential to the financial integrity

of a finite fund subject to partial liquidation upon the occur-

rence of events, such as death or illness. Virtually all insurance

companies, including members of the Council and the HIAA,

enter into contracts of insurance, establish claim procedures and

remedies, calculate premiums and establish reserves in reliance

upon these risk allocations. Because the opinion below creates

the possibility that contractual remedies may be wholly abro-

gated by the unpredictable creation of an amorphous new tort

cause of action, and that the partial payment or nonpayment of

an insurance claim may be accompanied by a substantial, yet

unpredictable, punitive award, the stability of the insurance

industry in general, and of insurance companies in particular, is

seriously threatened. Members of the Council and the HIAA

will be forced to incur the increased costs of defending against a

proliferation of “bad faith” claims seeking punitive relief, and

of making payment of unmeritorious claims to avoid such

actions in the future. Faced with large and unpredictable

punitive awards—awards not anticipated in the contractual

scheme of the insurer-insured relationship—members of the

Council and the HIAA may be unable to provide affordable

policies of insurance, or, in certain circumstances, to provide

such policies at all due to the increased liabilities associated

with them. The problems posed by the decision below are

serious ones for the companies that sell, and for the people who

buy, insurance. The Council and the HIAA thus have a direct

and immediate interest in the issues presented in this case.

ies

3

STATEMENT 2

Appellees were insured beneficiaries of a group policy of

health insurance issued by Aetna Life Insurance Company

(“Aetna”), the appellant herein, to the City of Mobile, Ala-

bama. On February 3, 1977, appellee Margaret W. Lavoie was

admitted to the Mobile Infirmary Hospital, apparently because

of back pains and osteoarthritis. During her twenty-three day

stay at the hospital, her doctors conducted extensive diagnostic

testing. Her discharge diagnosis was “Osteoarthritis: Mild

Psychophysiologic reaction manifested by abdominal pain.”

Jurisdictional Statement, App. A at 4a.

Appellees filed a claim under the group policy issued by

Aetna for an amount totaling $3,028.25. On June 3, 1977,

Aetna paid to appellees, the attending physician and the

hospital a total of $1,579.74. Pursuant to the terms of the

policy of insurance, Aetna declined to pay for various other

charges, including some of the diagnostic tests, on the basis that

these charges were incurred for care and services not necessary

for treatment of the disease involved. The stipulated amount of

the charges which Aetna declined to pay is $1,650.22. Aetna

again declined to pay the remainder of the claim on November

14, 1977, December 23, 1977 and August 3, 1978.

The Proceedings Below

Appellees filed suit against Aetna alleging, inter alia,

breach of contract and bad faith failure to pay an insuratice

claim, and seeking compensatory and punitive damages. Be-

cause the State of Alabama did not recognize a cause of action

for “bad faith,” the action was dismissed. On August 31, 1979,

the Supreme Court of Alabama reversed, stating that a cause of

action for bad faith failure to pay an insurance claim had been

“neither accepted nor rejected” in Alabama. Lavoie v. Aetna

2 This bref omits references to the reports of the opinions below, a

statement of the grounds of jurisdiction, a recitation of constitutional provi-

sions involved, and the questions presented, and adopts the statements in

Appellant’s brief on these subjects.

4

Life & Casualty Co., 374 So. 2d 310, 311 (Ala. 1979). Upon

remand, the Circuit Court of Mobile County granted Aetna’s

motion for summary judgment on the “bad faith” claim.

In a trilogy of cases handed down by the Alabama

Supreme Court on October 2, 1981, the Court changed the law

of Alabama—introducing not only a “bad faith” cause of

action,? but also the amorphous doctrine of punitive damages in

such actions,‘ and set the stage for this appeal. In light of these

decisions, the Supreme Court of Alabama reversed the Circuit

Court’s decision granting summary judgment to Aetna on the

“bad faith” claim, and again remanded to the Circuit Court.

Lavoie vy. Aetna Life & Casualty Co., 405 So. 2d 17, 18 (1981).

Cn November 4, 1982, a jury returned 4 verdict against

Aetna in favor of appellees, awarding $1,650.22 in com-

pensatory damages and $3.5 million in punitive damages. On

December 7, 1984, the Supreme Court of Alabama affirmed the

award, departing from its own precedents and again enlarging

the new tort. The Court held that a plaintiff need not be

entitled to judgment as a matter of law on the contract claim in

order for the bad faith action to go to the jury,5 and that partial

payment of a claim would not defeat a bad faith action.® This

broadening departure from existing precedent was announced

in an opinion joined by five justices. Four justices dissented.

On December 21, 1984, Aetna filed an Application for

Rehearing.

While Aetna’s Application for Rehearing was pending,

Aetna learned that Justice Embry—the justice who wrote the

3 Chavers v. National Security Fire & Casualty Co., 405 So. 2d | (Ala.

1981).

* Gulf Atlantic Life Insurance Co. v. Barnes, 405 So. 2d 916, 925 ( Ala.

1981).

SIn 1982, the Alabama Supreme Court in National Savings Life

Insurance Co. v. Dutton, 419 So. 2d 1357, 1362 (Ala. 1982), held that, as a

general rule, a bad faith claim was not cognizable unless a plaintiff was

“entitled to recover on the contract claim as a matter of law.”

§ In National Security Fire & Casualty Co. v. Bowen, 417 So. 2d 179, 186

(Ala. 1982), the Alabama Supreme Court had reaffirmed its position that

partial payment of a claim would generally defeat the issue of bad faith

refusal to pay. See also Sexton v. Liberty National Life Insurance Co., 405 So.

2d 18 (1981).

5

December 7, 1984 majority decision—had, less than a year

before rendering his decision in this case, filed suit against Blue

Cross-Blue Shield of Alabama (“Blue Cross”), alleging bad

faith failure to pay an insurance claim and seeking punitive

damages. On February 21, 1985, Aetna filed motions seeking

to disqualify Justice Embry from rendering any decision on

Aetna’s Application for Rehearing, requesting the other justices

to disqualify themselves, and seeking withdrawal of the Decem-

ber 7, 1984 decision. On March 8, 1985, Aetna’s dis-

qualification motion was denied with each justice determining

individually that he would not recuse himself. Aetna’s Appli-

cation for Rehearing was also overruled. Justice Embry

participated in these decisions.

On March 22, 1985, Aetna renewed its challenge to Justice

Embry’s participation in the decisions below, and moved again

for his disqualification. On March 25, 1985, the motion was

denied. Juszice Embry again participated in the decision.

SUMMARY OF ARGUMENT

I. Judge-made law, like !egislacon, can unravel a pre-

existing contract and frustrate constitutionally protected inter-

ests in the protections of that contract. See Lemon v. Kurtzman,

411 U.S. 192 (1973); Caevron Oil Co. v. Huson, 404 U.S. 97

(1971). As all insurers do, Aetna entered into an insurance

contract based upon the liabilities it assumed and the actuarial

incidence of those liabilities. Insurance cannot work any other

way. The decision below introduces a liability which is not only

new, but completely unpredictable and open-ended. By this

decision, Alabama denies Aetna “the stability of contractual

obligations” which the Contract Clause guarantees. United

States Trust Co. of New York v. New Jersey, 431 U.S. 1, 15

(1977). The essential stability is no less undermined by nine

officials in court than by a legislature in session. This Court

should not apply Tidal Oil Company v. Flanagan, 263 U.S. 444

(1924), a case whose jurisprudential basis is now recognized to

be unrealistic and outmoded, to deny the necessary relief.

II. The award of punitive damages below—more than

2,100 times the actual damages in a case which did not involve

6

invasion of any basic right or imposition of any severe or

continuing injury—was imposed without any coherent substan-

tive standards and without any particular procedural

safeguards to ensure that the award was rational, fair, or based

upon intelligible standards. This offends both due process and

the Eighth Amendment prohibition against excessive fines. It is

clear that the award was punishment—and very serious punish-

ment indeed. It is also clear that any criminal defendant faced

with a $100 misdemeanor, and any jury charged with imposing

it, would have been provided clearer standards and more

exacting guidance than that provided to Aetna and the jury

below. “Bad faith” and the distinctions between negligence

and malice are concepts too blurry to support the huge and

unpredictable range of results available to juries. The result

reflected in the verdict below demonstrates all too clearly the

imprecision in asking juries to draw such distinctions. A higher

standard of proof, and a clearer definition of the predicate

conduct, are required, at the very least, to restore a semblance

of due process.

The award of $3.5 million itself violates the Eighth

Ame~.dment as well because it is grossly disproportionate to the

offense charged. Punitive damages are civil fines wich penal

purposes, and, as punishment, the basic Eighth Amendment

principle of proportionality should apply to them. This prin-

ciple, which has been applied since the Magna Carta, is, like

other legal principles here, a bulwark against arbitrariness and

jury passion. The “ ‘parallel limitations’ on bail, fines, and

other punishments”, Solem v. Helm, 463 U.S. 277, 289 (1983),

embodied in the Eighth Amendment should apply to an

exaction that operates as a fine. That the jury exacted a fine

without the support of either a criminal finding or the limits of a

criminal statute should argue ror, rather than against, relief.

Although the Eighth Amendment has yet to be applied in a

punitive damages case, the time is now ripe. The proliferation

of punitive awards, the meaningless standards, the profligacy of

the amounts assessed all demonstrate tiat there is no rational or

reliable jurisprudence to be applied hee if the Due Process

Clause and the Eighth Amendment are not. Punitive damages

become a windfall for the plaintiff, and a spring-gun in the

7

woods—a random, cruel surprise—for defendants. Punitive

damages should not continue to enjoy an immunity from

constitutional scrutiny.

ARGUMENT

I. THE CREATION OF A NEW TORT CAUSE OF AC-

TION RETROACTIVELY APPLICABLE TO EXIST-

ING CONTRACTS CONSTITUTES AN IMPAIRMENT

OF CONTRACTUAL OBLIGATIONS IN CON-

TRAVENTION OF THE CONTRACT CLAUSE

If the Alabama legislature had passed a statute altering the

remedial scheme embodied in contracts of insurance in Ala-

bama by creating a new tort cause of action which was

retroactively applicable to those existing contracts, there would

be no doubt that the state had violated the Contract Clause of

the United States Constitution. See Allied Structural Steel Co.

v. Spannaus, 438 U.S. 234, reh’g denied, 439 U.S. 886 (1978);

United States Trust Co. of New York v. New Jersey, 431 U.S. |

(1977). The mere fact that the unanticipated creation of new

contractual liabilities, under the guise of the tort of bad faith,

was the product of judicial legislaticu, as opposed to statutory

enactment, should not shield this action from constitutional

scrutiny.

Judges as well as legislators make law, and judge-made

laws, like statutes, engender constitutionally protected reliance

interests. That judges make law has been expressly acknowl-

edged by this Court in a series of recent decisions which

recognize a doctrine of nonretroactivity in cases where unantici-

pated federal judicial rulings would upset well-founded reliance

interests. See, e.g., Arizona Governing Committee v. Norris, 463

U.S. 1073 (1983); Hill v. Stone, 421 U.S. 289, reh’g denied, 422

U.S. 1029 (1975); Lemon v. Kurtzman, 411 U.S. 192 (1973);

Chevron Oil Co v. Huson, 404 U.S. 97 (1971); City of Phoenix

v. Kolodziejski, 399 U.S. 204 (1970); Cipriano v. City of

Houma, 395 U.S. 701 (1969). In these cases, the Court

recognized the “fact of legal life” that judges, as well as state

legislators, make law and that “even judge-made rules of law

8

are hard facts on which people must rely in making decisions

and in shaping their conduct.” Lemon v. Kurtzman, 411 U.S. at

199 (1973).7 Thus, when this Court determines whether to

apply a constitutional decision retroactively, it now engages in a

“process of reconciling the constitutional interests reflected in a

new rule of law with reliance interests founded upon the old.”

Lemon, 411 U.S. at 198.8 Implicit in this process is a recognition

by this Court that these reliance interests can themselves reach

constitutional proportions, and cannot be swept away with the

old rule of law.

The reliance interests of Aetna in particular and of insurers

in generai who contract to provide insurance in Alabama are

significant. As this Court recognized in Allied Structural Steel

Co. v. Spannaus, 438 U.S. at 246-47, reliance interests are

particularly strong in the business of insurance. Insurance is

essentially a system of private ordering—the consensual estab-

lishment of legal rights and obligations between parties. As

with any contract, insurance contracts cannot be repugnant to

la, and the system of law existing at the time of the contract

supplements, without impairing, this consensual relationship.

7 The need for judicial accountability to constitutional standards when

judges are making law—particularly laws which have broad impact through

retroactive as well as prospective application—is dramatically illustrated by

this case. The substance of the rule applied will virtually always be easier to

assess than the interest of the tribunal. A reviewing court can focus upon

substantive and meaningful standards in making law to ensure that con-

stitutional interests are protected, and absolve itself generally of review of the

judicial processes of state tribunals. This approach allows this Court to face

substantial constitutional issues, to decide cases with resort to traditional

substantive principles, and to avoid making ad hoc, and sometimes difficult,

decisions of judicial ethics. For insurers, like Aetna, who do business in

Alabama, reliable protection against encroachment upon constitutional rights

must come from adherence to general constitutional standards, and not from

after-the-fact scrutiny of the bias and interests of a particular tribunal.

8 See also Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). In Chevron,

this Court articulated a three-part test, which has been followed in subsequent

cases, to determine when the doctrine of nonretroactivity will apply: (1)

whether the new decision is a clear break from prior law which was not

foreshadowed; (2) whether retroactive effect is necessary for the operation of

the new principles announced; and (3) whether substantial inequity would

result from a retroactive application. /d. at 106-108.

9

Thus, cognizant of the laws of the states in which they contract

to provide insurance, insurers like Aetna assess their potential

liabilities, calculate premiums, allocate reserves, and enter into

contracts of insurance.

In this case, Aetna, an out-of-state insurer, entered into a

contract of insurance with the City of Mobile in 1967. That

contract was made by Aetna with knowledge of its obligations

under Alabama’s pervasive insurance laws,® and with aware-

ness of the decisions of the Alabama courts interpreting those

laws. This contract, like any other contract in Alabama, was

subject to the general rule that no punitive damages may be

awarded in contract actions. '°

In a series of decisions in 1981—fourteen years after Aetna

had contracted to provide insurance to the City of Mobile —the

Supreme Court of Alabama drastically upset the reliance

interests of Aetna by legislating an entirely new tort cause of

action which it retroactively applied in 1984 to Aetna’s 1967

contract of insurance. Significantly, the Alabama Supreme

Court was not reinterpreting existing laws or decisions when it

ruled that a cause of action for bad faith failure to pay an

insurance claim existed in Alabama. Instead, it created an

entirely new remedy enormously increasing the potential lia-

bility for breach of contract—a remedy which had not pre-

viously existed in Alabama—and labeled it as the tort of “bad

faith.” By so doing, the Alabama Supreme Court abrogated the

consensual arrangement between Aetna and the City of Mobile,

and imposed upon Aetna a $3.5 million liability which could

not have been anticipated at the time of contracting.

The impact of abrogating these reliance interests is severe,

and completely at odds with the central concern of the Contract

® Insurance companies, and contracts of insurance, are subject to com-

prehensive regulation in Alabama. Indeed, the Alabama Insurance Code

occupies nearly an entire volume of the Code of Alabama, and consists of 40

chapters regulating insurance in general as well as specific types of insurance.

See Ala. Code §§ 27-1 through 27-40 (1975).

10 See, e.g., Wood v. Citronelle-Mobile Gathering System Company, 409

F.2d 367 (Sth Cir. 1968) (applying Alabama law); Geohagan v. General

Motors Corp., 29\ Ala. 167, 279 So.2d 436 (1973).

10

Clause: “to encourage trade and credit by promoting con-

fidence in the stability of contractual obligations.” United States

Trust Co. of New York v. New Jersey, 431 U.S. at 15. The

decision below undercuts any expectation of stability in the

insurance industry in Alabama.'' It eliminates from the insur-

er’s considerations the existing law of the state in which it

contracts, and exposes the insurer to unforeseen and unpredict-

able creations of new obligations by state courts—not in small

matters of detail, but, in this case, increasing liability more than

2,100 times. '2

This Court’s decision in Tidal Oil Company v. Flanagan,

263 U.S. 444 (1924), that the Contract Clause was directed

only to impairments of contracts by legislation, and not by

judgments of state courts, poses the only possible bar to

concluding that the decision below violates the Contract Clause.

Tidal Oil, however, runs counter to the central concern of the

Contract Clause, and rests upon a formalistic and outmoded

view of the law which holds that judges do not make new law,

but simply declare what the law has always been.'3 Because

this view is inconsistent with the Court’s retroactivity decisions,

'' Moreover, the imposition of unpredictable and substantial punitive

damages upon insurance companies hampers compliance with and enforce-

ment of state insurance laws and regulations, particularly those requirements

relating to the maintenance of adequate reserves and requirements designed

to ensure the solvency of insurance companies.

‘2 This Court recently recognized the unfairness of applying laws which

‘vere not within the parties’ expectations at the time of contracting. In Phillips

Petroleum Co. v. Shutts, No. 84-233 (June 26, 1985), the Court concluded

that Kansas contract and equity law could not be applied to transactions of

the parties in a manner consistent with due process, stating (at 25) (citations

omitted ):

When considering fairness in this context, an important element

is the expectation of the parties.... There is no indication that

when the leases involving land and royalty owners outside of

Kansas were executed, the parties had any idea that Kansas law

would control.

‘3 Moreover, the historical basis of Tida/ Oil is suenect. As early as 1863,

this Court in Gelpcke v. City of Dubuque, | Wall. 175, expressed an

interpretation of the Clause which is more consonant with its pur-

pose—namely, that if a contract, when made, is valid, it cannot be impaired

by subsequent legislation or by judical decision altering the construction of the

law.

Witten os n

|!

this Court must reconcile Tidal O:/ with the realities of modern-

day jurisprudence. '¢

Only by protecting Aetna’s valid contractual expectations

from unpredictable legislation by the judiciary can this Court

preserve the values embodied in the Contract Clause. To hold

this Clause inapplicable in this case would be to permit

Alabama to accomplish through its judiciary what it could not

constitutionally do through its legislature.

Il. THE DECISION OF THE SUPREME COURT OF

ALABAMA UNPHOLDING MASSIVE PUNITIVE

DAMAGES SHOULD NOT STAND UNDER DUE

PROCESS OR THE EIGHTH AMENDMENT

A. The Assessment of Punitive Damages Against Appel-

lant is Violative of Due Process

Punitive damages are not “a favorite of the law.” See

Smith v. Wade, 461 U.S. 30, 58 (1983) (Rehnquist, J.,

dissenting). They are an historical anomaly, transplanted in

neo-natal form to American soil from eighteenth century Eng-

land and nurtured by early American courts which employed

punitive damages to compensate victims in small amounts for

intangible injuries which the law otherwise did not recognize. '5

Punitive damages were thus awarded in small sums to victims

14 Tidal Oil is also inconsistent with other decisions of this Court. This

Court Aas interpreted “law” to mean common law in the context of the First

Amendment, which provides that “Congress shall make no law . . . abridging

the freedom of speech.” Even though the First Amendment refers specifically

to law made by Congress, this Court has given the Amendment a broader

interpretation. See, e.g., Bridges v. California, 314 U.S. 252 (1941) (applied

to judicial contempt citations ); New York Times Co. v. Sullivan, 376 U.S. 254

(1964) (applied to common law actions of libel against public officials). C/.

The Sunday Times v. United Kingdom, 2 E. H. R. R. 245, 270 (European

Court of Human Rights 1979) (“ ‘law’... covers not only statute but also

unwritten law”).

18 The doctrine of punitive damages was recognized in 1851 by this

Court in a modest way in Day v. Woodworth, 13 Howard 363 (1851). Ina

passage considered to be the foundation of punitive damages in American

law, Justice Grier, writing for the Court, stated (13 Howard at 371):

It is a well-established principle of the common law, that in

actions of trespass and all actions on the case for torts, a jury may

(footnote continues)

12

of tortious conduct, such as libel or slander, where actual

damages for humiliation or affronts to dignity were largely

unascertainable. See Nelson, Punishment for Profit: An Exam-

ination of the Punitive Damage Award in Strict Liability, 18

Forum 377, 380-81 ( 1983).

From this small beginning, punitive damages have recently

branched far beyond their origins in insult torts and have been

stretched beyond the limits of their validity.'* The expansion of

this doctrine beyond the traditional tort areas, without historical

justification, has brought an explosive increase in the size and

frequency of punitive damages awards '7—a phenomenon

strikingly evident in this case, where a $3.5 million punitive

damages award was upheld against Aetna for failure to pay a

portion of a $3,000 insurance claim. Moreover, staggering ~

(footnote continued)

inflict what are called exemplary, punitive or vindictive damages

upon a defendant, having in view the enormity of his offence

rather than the measure of compensation to the plaintiff. .. . In

many civil actions, such as libel, slander, seduction, &c., the

wrong done to the plaintiff is incapable of being measured by a

money standard; and the damages assessed depend on the

circumstances, showing the degree of moral turpitude or atrocity

of the defendant’s conduct, and may properly be termed ex-

emplary or vindictive rather than compensatory.

6 As has been well said in another context, “these laws are being

extrapolated to places where they no longer apply.” Bernstein, “Dread

Singularities” (Book Review), New York Times Book Review, April 25,

1982, p. 10.

17 The seemingly uncontrolled growth in both the size and frequency of

punitive damages awards is evident in product liability and mass tort cases.

See, e.g., O’Gilvie v. International Platex, No. 83-1846-K (D. Kan. May 24,

1985) ($10 million jury award of punitive damages reduced to $1.35 million

after defendant implemented remedial measures); Grimshaw v. Ford Motor

Co., 119 Cal. App. 3d 757, 174 Cal. Rptr. 348 (1981) ($125 million punitive

award remitted to $3.5 million); Ford Motor Company v. Stubblefield, 319

S.E.2d 460 (Ga. App. 1984) ($8 million); Palmer v. A.H. Robins Co., 684

P.2d 187 (Colo. 1984) ($6.2 million); Dorsey v. Honda Motor Co., 655 F.2d

650 ( Sth Cir. 1981) ($5 million), modified on other grounds, 670 F.2d 21 (Sth

Cir. ), cert. denied, 459 U.S. 880 (1982); Airco Inc. v. Simmons First National

Bank, 276 Ark. 486, 638 S.W.2d 660 (1982) ($3 million); Hasson v. Ford

Motor Company, 32 Cal.3d 388, 185 Cal. Rptr. 654, 650 P.2d 1171 (1982)

($4 million ), cert. dismissed, 459 U.S. 1190 (1983). Many other comparable

awards, and awards in smaller amounts, have proliferated.

- —

eet te =

13

sums have been awarded as punitive damages in other cases

against insurance companies by juries, who, left unguided, have

assessed damages “in a way that can only be called freakish.”

Gregg v. Georgia, 428 U.S. 153, 206, reh’g denied, 429 U.S. 875

(1976).18 The lower courts have varied unpredictably in their

willingness to face the implications of such awards for fairness

and due process. Although some awards have not survived

judicial scrutiny,'® many have.2°

18 While perhaps some of the more exorbitant punitive damages awards

have been rendered by juries in California and Arizona, see notes 19 and 20,

infra, similarly outrageous awards have been handed down by Alabama

juries. Two recent cases, one affirming a jury award of $1,250,000 against an

insurance company on a bad faith claim, see Nationwide Mutual Insurance

Co. v. Clay, Nos. 82-536, 82-917 (Ala. Feb. 8, 1985), and another affirming

an award of $3,000,000, see American Pioneer Life Insurance Co. v. Sandlin,

No. 82-1063 (Ala. April 12, 1985), amply demonstrate the arbitrariness of

punitive damages awards in insurance litigation.

19 See, e.g., San Jose Production Credit Association v. Old Republic Life

Insurance Co., 723 F.2d 700 (9th Cir. 1984) (court reversed jury award of

$500,000 in punitive damages); Egan v. Mutual of Omaha, 24 Cal. 3d 809,

157 Cal. Rptr. 482, 598 P.2d 452 (1979), appeal dismissed, 445 U.S. 912

(1980) (jury award of $5 million in punitive damages against insurer for

failure to conduct proper investigation of its insured’s claim held to be

excessive in that award was 40 times larger than the compensatory damages

award and represented two and one-half months of the insurer’s net income in

1973 as well as more than seven months of its income in 1974).

20 See, e.g., T.D.S. Inc. v. Shelby Mutual Insurance Co., 760 F.2d 1520

(lith Cir. 1985) (jury award of $2.1 million in punitive damages against

insurer held not to be excessive}; Tibbs v. Great American Insurance Co., 755

F.2d 1370 (9th Cir. 1985) (court upheld award of $600,000 in punitive

damages); Dempsey v. Auto Owners Insurance Co., 717 F.2d 556 (11th Cir.

1983) (court held jury award of $3.1 million to be excessive and remanded

with directions to require a remittitur to $1.5 million); Frazier v. Metropolitan

Life Insurance Co. No. B004240 (Cal. App. June 10, 1984) (jury award of

$8 million in punitive damages, as remitted to $2 million, overturned upon

finding that claim was time-barred); Moore v. American United Life Insur-

ance Co., 150 Cal. App. 3d 610, 197 Cal. Rptr. 878 (1984) (court held $2.5

million punitive damages award not to be excessive, even though award was

83 times the amount of compensatory damages); Sparks v. Republic National

Life Insurance Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070

(1982) ($3 million award punitive damages for insurer’s tortious termination

of insurance benefits upheld); Pistorius v. Prudential Insurance Co., 123 Cal.

App. 3d 541, 176 Cal. Rptr. 660 (1981) (court upheld award of $1 million in

(footnote continues)

14

The conduct of the insurance business suffers in particular

because insurance depends heavily on the ability to make

careful and exact computations of risks. Contracts of insurance

are premised upon these risk calculations, and the ability of

insurers to predict with relative accuracy their liabilities over a

period of time is crucial to the development and maintenance of

adequate reserves in any sound system of insurance.

Because the purposes and impact of punitive damages

awards are plainly penal, constitutional protections akin to

those accorded to criminal defendants should be afforded to

defendants in punitive damages actions. A civil label should

not blind this Court to their penal nature and purposes. See,

e.g., United States v. Ward, 448 U.S. 242, reh’g denied, 448 U.S.

916 (1980); Kennedy v. Mendoza-Martinez, 372 U.S. 144

(1963). As this Court has stated:

How simple would be the tasks of constitutional

adjudication and of law generally if specific problems

could be solved by inspection of the labels pasted on

them! ... Doubtless even a clear... classification of

a statute as “non-penal” would not alter the

fundamental nature of a plainly penal statute.

Trop v. Dulles, 356 U.S. 86, 94-95 (1958). Thus, although a

penalty has been labeled civil, this Court has declined to view it

as such where the penalty is “so punitive either in purpose or

effect” as to negate such a labeling. United States v. Ward, 448

U.S. at 248-49.21

(footnote continued)

punitive damages); Neal v. Farmers Insurance Exchange, 2| Cal.3d 910, 148

Cal. Rptr. 389, 582 P.2d 980 (1978) (court upheld jury award of punitive

damages, as reduced to $740,000).

21 This Court, as well as the lower courts, have been guided by the list of

considerations articulated in Mendoza-Martinez, 372 U.S. at 168-69, in

determining whether a law is penal in nature. Assessed under these factors,

which are “neither exhaustive nor dispositive,” United States v. Ward, 448

U.S. at 249, punitive damages can only be deemed penal. While punitive

damages impose no “affimative disability or restraint,” Mendoza-Martinez,

372 U.S. at 168, they typically are imposed upon a showing of “willfulness”

(footnote continues)

Sie ate ey

15

Members of this Court have recognized that punitive

damages are essentially penal. Indeed, this Court has stated:

Punitive damages ‘are not compensation for injury.

Instead, they are private fines levied by civil juries to

punish reprehensible conduct and to deter its future

occurrence.”

International Brotherhood of Electrical Workers v. Foust, 442

U.S. 42, 48 (1979) (emphasis added ), quoting Gertz v. Robert

Welch, Inc., 418 U.S. 323, 350 (1974). See also Smith v.

Wade, 461 U.S. 30, 58 (dissenting opinion of Justice

Rehnquist). Punitive damages thus further no goals of the civil

law. They serve only to promote the traditional goals of

punishment, namely, retribution and deterrence—goals which

this Court has stated “are not legitimate nonpunitive govern-

mental objectives.” Bell v. Wolfish, 441 U.S. 520, 539 n. 20

(1979).

This Court in Mendoza-Martinez recognized that con-

stitutional safeguards must be accorded to defendants in pro-

ceedings in which the sanction to be imposed is punishment. In

striking down a statute which provided for the automatic

forfeiture of citizenship as a penalty for draft evasion, the Court

concluded that the statute was essentially penal, and that its

application deprived the appellees of their citizenship without

due process of law and without according them the nights

guaranteed by the Fifth and Sixth Amendments. In so holding,

the Court stated:

What we hold is only that, in keeping

with ... cherished tradition, punishment cannot be

imposed ‘without due process of law.’ Any lesser

(footnote continued)

or “maliciousness”, they are often assessed in amounts greater than criminal

actions involving similar conduct, and no alternative purposes—other than

punishment and deterrence—can rationally be assigned to them. See Grass,

The Penal Dimensions of Punitive Damages, \2 Hastings Const. L. Q. 241

(1985), and Wheeler, The Constitutional Case for Reforming Punitive

Damages, 69 Va. L. Rev. 269 (1983), for exhaustive analyses of the penal

nature of punitive damages.

16

holding would ignore the constitutional mandate

upon which our essential liberties depend.

Mendoza-Martinez, 372 U.S. at 186.

That punitive damages actions, as they now exist, fail to

comport with even the simplest notion of due process is evident

from the complete lack of standards for assessing punitive

damages, coupled with the unbridled discretion of judges and

juries in awarding such damages. Punitive damages, in unde-

fined and accelerating amounts, have been awarded to punish

and deter conduct which ranges from “malice” to some degree

of “negligence.” A multitude of necessarily overlapping and

somewhat redundant terms have been employed to support

awards of punitive damages against a defendant whose conduct

lies somewhere in between.22 And, application of these “stan-

dards” continues to be imprecise, given the uncertainty sur-

rounding the definitions of such terms as “malice,” see Smith v.

Wade, 461 U.S. 30, 38-41 and n.6, and given the blurred

distinctions between terms like “willful,” “wanton,” “reckless

22 While awards of punitive damages have traditionally been premised

upon conduct which is found to be “malicious,” “willful” or “wanton”, these

standards, though never carefully defined, have been perceptibly lowered,

permitting courts to award punitive damages against a defendant whose

conduct can be characterized, at most, by some heightened degree of

negligence. See, e.g., Dempsey v. Auto Owners Insurance, 717 F.2d 556, 561

(llth Cir. 1983) (applying Alabama’s standard requiring “maliciousness,

willfulness, or wanton and reckless disregard for the rights of others,” court

upheld punitive award as remitted to $1.5 million ); Jackson v. Johns-Manville

Sales Corp., 727 F.2d 506, 526 (Sth Cir. 1984) (applying Mississippi’s

requirement of a showing of “wanton, gross, or intentionally wrongful

conduct,” court disallowed punitive damages award); Airco Inc. v. Simmons

First National Bank, 276 Ark. 486, 638 S.W.2d 660, 663 (1982) (defendant’s

reckless disregard of the consequences held to warrant $3 million punitive

award ); Maxey v. Freightliner Corporation, 450 F.Supp. 955, 963 (N.D. Tex.

1978) (punitive damages may be awarded if defendant acts “intentionally or

willfully, or with a degree of ‘gross negligence’ which approximates a fixed

Purpose to bring about the injury”), aff'd, 623 F.2d 395 (Sth Cir. 1980),

vacated and remanded upon rehearing, 665 F.2d 1367 (Sth Cir. 1982),

vacated in part and aff'd in part, 722 F.2d 1238 ( Sta Cir. 1984); Sturm, Ruger

& Co. v. Day, 594 P.2d 38, 46 (Alaska 1979), cert. denied, 454 U.S. 894

(1981) (even though punitive damages were warranted on the basis of

(footnote continues)

17

disregard” and “conscious indifference.” See Ellis, Fairness and

Efficiency in the Law of Punitive Damages, 56 So. Cal. L. Rev.

1, 34-37 (1982).23 Consequently, these vague and varying

standards provide no real guidance to courts and juries. Jd.24

Moreover, the standards upon which courts rely in reviewing

(footnote continued)

defendant’s “reckless indifference to rights of others, and conscious action in

deliberate disregard of them,” jury award was held to be excessive); Hansen

vy. Johns-Manville Products Corp.,.734 F.2d 1036, 1043 (Sth Cir. 1984), cert.

denied, 105 S. Ct. 1749 (1985) (punitive damages awarded on the basis of

Texas’ “gross negligence” standard); Campus Sweater & Sports Wear Co. v

M.B. Kahn Construction Co., 515 F.Supp. 64, 104 (D.S.C. 1979) ( punitive

damages upheid on basis of South Carolina’s standard of negligence which is

“so gross or reckless of consequences as to imply or assume the nature of a

wantonness, willfulness or recklessness”), aff'd without opinion, 644 F.2d 877

(4th Cir. 1981). See also Meyers and Barrus. Punitive Damages in Product

Liability Cases: A Survey, 5\ Ins. Counsel J. 212 (April 1984). The Court

below, in upholding the $3.5 million punitive award against Aetna, apparent-

ly deemed Aetna’s conduct to be “oppressive, malicious, willful [and]

fraudulent.” Jurisdictional Statement, App. A at 35a.

23 The difficulty of distinguishing between conduct which is “reckless” as

opposed to merely “negligent” leads inevitably to inconsistent applications of

these standards. As stated by one author.

Unfortunately, the distinction between recklessness and negli-

gence relates to no clear behavioral standards in the real

world .... It is truly striking how we have devised a system that

is not far removed from a lottery for deciding such grave

matters —with the draw determined by not only the predilections

of the presiding judge, but the emotions of the jury sitting in the

case.

Rabin, Dealing with Disasters: Some Thoughts on the Adequacy of the Legal

System, 30 Stan. L. Rev. 281, 297 (1978).

24 In an opinion certifying Montana law to a Federal district court, the

Supreme Court of Montana recognized this uncertainty in the area of punitive

damages. See First Bank (N.A.)—Billings. v. Transamerica Insurance Co.,

679 P.2d. 1217 (Mont. 1984). In concluding that insurance coverage of

punitive damages does not violate Montana’s public policy, the court noted

that “juries and judges typically award punitives for a broad range of conduct

not often described as willful or wanton, but as merely reckless or unjusti-

fiable.” Jd. at 1222. Refusing to preclude such insurance coverage in light of

the uncertainty in the area of punitive damages, the court further stated that

“fact-finders ... wrestle with concepts like recklessness and reasonableness,

(footnote continues)

i8

jury awards of punitive damages are equally imprecise, requir-

ing judges to inquire generally whether an award reflects the

Passions or prejudices of the jury.25

Similarly vague are the standards used for determining the

amount of punitive damages to be assessed against a defendant.

This amount is generally left to the sole discretion of the jury,

guided only by certain ill-defined factors relating to the nature

of the defendant’s misdeed and including the wealth of the

defendant, thus emphasizing the punitive nature of the award.

The lack of standards, and, indeed, of rationality, for assessing

punitive damages has prompted members of this Court to

comment on the arbitrary and prejudicial nature of punitive

damages awards. As Justice Powell stated in Gertz v. Robert

Welch, Inc., 418 U.S. 323, 350 (1973):

In most jurisdictions jury discretion over the amounts

[of punitive damages] awarded is limited only by the

gentle rule that they not be excessive. Consequently,

juries assess punitive damages in wholly unpredict-

able amounts bearing no necessary relation to the

actual harm caused.

See also International Brotherhood of Electrical Workers vy.

Foust, 442 U.S. 42, 50-51 (1979); Smith v. Wade, 461 U.S. 30,

(footnote continued)

such that defendants may not know that their conduct constituted presumed

malice until after trial, and that a defendant in one case may never know the

sting of punitive damages while another defendant in a similar case may be

faced with financing a sizeable award.” Jd. Recognizing, as the Montana

Supreme Court did, the randomness of punitive damages awards, the

Montana legislature passed legislation, effective April 16, 1985, limiting the

applicability of punitive damages. The statute requires, inter alia, that the

elements of a claim for punitive damages be proven by clear and convincing

evidence, and places limits on the amounts in which punitive damages can be

awarded. See Mont. Code Ann. 3 27-1-221 (1983), as amended by House

Bil 303.

25 The potential for arbitrariness is inevitably increased when articulabie

standards are not applied «w judicial action. See pp. 3-5, supra. Resort to ad

hoc decisions regarding judicial ethics is an inappropriate, and ineffective,

method of protecting constitutional rights. Only the application and enforce-

ment by judicial tribunals of sound constitutional standards, establishing

predicate conduct and adequate procedures and governing the proportionality

of awards, can adequately ensure that these rights are not abrogated.

or Be ne oe Mea.” Cane 4. : See aS

19

56-65, 92-94 (dissenting opinions of Justices Rehnquist and

O’Connor ).26

Despite the complete lack of standards for assessing puni-

tive damages, no unique procedures have been developed to

protect a defendant in a punitive damages action from the risk

that such damages will be improperly awarded, based upon the

whim or caprice of a judge or jury. Further, the absence of

procedures satisfying even the most fundamental concepts of

due process results in arbitrary and erroneous deprivations of

property, and in the stigma which necessarily attaches to a

defendant whose conduct is characterized as “fraudulent,”

“malicious” or “wanton”. Due process cannot be satisfied in a

punitive damages action without detailed and carefully tailored

procedural safeguards, such as an elevated standard of proof,

limitations on the amounts of punitive damages, and bifurca-

tion of punitive damages trials.

The constitutional infirmities which inhere in punitive

damages actions should no longer be ignored. If not eliminated

entirely from the field of insurance—an area where they do not

belong—punitive damages should be limited, and defendants

should, at a minimum, be accorded the constitutional protec-

tions guaranteed to other defendants who are subject to

punishment by juries and courts. The ultimate responsibility

rests with this Court to guard against stealthy encroachments

upon constitutional rights by practices which spring from

unjustified deviations in the law. No better example of a

stealthy encroachment—and one which should be halted by

this Court—exists than punitive damages.

26 As Justice Rehnquist stated in Smith v. Wade (461 U.S. at 87-88):

It is anomalous, and counter to deep-rooted legal principles and

common-sense notions, to punish ; ersons who meant no harm,

and to award a windfall, in the form of punitive damages to

someone who already has been fully compensated. These

peculiarities ought to be carefully limited—not expanded to every

case where a jury may think a defendant was too careless,

particularly where a vaguely defined, elastic standard like “reck-

less indifference” gives free reign to the biases and prejudices of

juries. In short, there are persuasive reasons not to create a new

Punitive damages remedy unless it is clear that Congress so

intended. |

20

B. The Decision Below Imposes an Excessive Fine in

Violation of the Eighth Amendment

Whereas due process provides safeguards against proce-

dures which result in arbitrary awards and standardless ver-

dicts, the Eighth Amendment provides an added protection

against arbitrariness and excessiveness in punishment. Focus-

ing upon the result itself, the Eighth Amendment ensures that

punishment will not be meted out arbitrarily, or in excessive

amounts wholly disproportionate to the offense. Even assuming

that the procedures employed in assessing and upholding

punitive damages awards comport with due process—which

they do not—the decision below cannot survive scrutiny under

the Eighth Amendment.

The Eighth Amendment’s ban against excessive punish-

ments and requirement of proportionality derive from English

law. By the thirteenth century, discretionary amercements,

often excessive and oppressive, had become prevalent in Eng-

land—so prevalent that three chapters of the Magna Carta

were devoted to their control.27 Indeed, Chapter 20 of the

Magna Carta, setting forth the rule against excessiveness in

punishment, provided:

A free man shall not be amerced for a trivial offence,

except in accordance with the degree of the offence,

and for a serious offence he shall be amerced accord-

ing to its gravity, saving his livelihood; and a mer-

chant likewise, saving his merchandise; in the same

way a villein shall be amerced saving his wainage; if

they fall into our mercy. And none of the aforesaid

27 See Granucci, “Nor Cruel cad Unusual Punishment Inflicted”: The

Original Meaning, 57 Cal. L.R. 839, 845 (1969). The amercement was the

equivalent of the modern fine. Amercements, given their discretionary

character, permitted the circumstances of each case to be considered, and the

fine fixed accordingly, but invited the opportunity for arbitrariness and

excessiveness. Jd.

le Se oR et eee ew

21

amercements shall be imposed except by the testi-

mony of reputable men of the neighborhood.

J. Holt, Magna Carta 323 (1965).28

The principle that amercements could not be excessive was

reiterated in the English Bill of Rights of 1689, which, in

language borrowed by the framers, strove to curb selective and

arbitrary application of harsh penalties by incorporating “the

longstanding principle of English law that the punishment...

should not be... greatly disproportionate to the offense

charged.” R. Perry, Sources of Our Liberties 236 (1959).

Evidencing the intent of the English Bill of Rights to preclude

disproportionate and excessive fines, the House of Lords,

“barely three months after the Bill of Rights was adopted...

declared that a ‘fine of thirty thousand pounds, imposed by the

court of King’s Bench upon the earl of Devon was excessive and

exorbitant, against magna charta, the common right of the

subject, and the law of the land.” Solem v. Helm, 463 U.S. 277,

285 (1983), quoting Earl of Devon’s Case, 11 State Tr. 133, 136

(1689).

The concept of proportionality which was firmly em-

bedded in English law by 1689 was transplanted to American

soil, and ultimately incorporated into the Bill of Rights as the

Eighth Amendment. See Solem v. Helm, 463 U.S. at 285-86.

This “constitutional principle of proportionality,” id. at 286,

was recognized by this Court as early as 1910. In Weems v.

United States, 217 U.S. 349, 367 (1910), the Court held that

the Eighth Amendment precluded the punishment of 15 years

of imprisonment plus hard labor in chains for the crime of

falsifying a public document, noting “that it is a precept of

justice that punishment for crime should be graduated and

proportioned to the offense.” On repeated occasions since

Weems, the Court has resorted to the constitutional principle of

26 Maitland said of this chapter that “very likely there was no clause in

the Magna Carta more grateful to the mass of the people.” F. Maitland, Pleas

of the Crown for the County of Gloucester xxxiv (1884), cited in Granucci,

supra, at 845.

22

proportionality to conclude that certain punishments are, or are

not, excessive.29 Most recently, this Court in Solem revisited the

concept of proportionality in punishments, holding that the

Eighth Amendment prohibits a life sentence, without possibility

of parole, for the commission of a seventh nonviolent felony.3°

Although this Court has had little occasion to address the

Excessive Fines Clause of the Eighth Amendment, the cases

decided under the Cruel and Unusual Punishments Clause

provide a useful framework for assessing the validity of puni-

tive damages under the Eighth Amendment—an issue of first

impression in this Court. In light of the common origin of the

clauses of the Eighth Amendment, the concept of proportion-

ality should be equally applicable to all of the clauses of the

Amendment. Indeed, as this Court has stated:

We have recognized that the Eighth Amendment

imposes ‘parallel limitations’ on bail, fines, and other

punishments, Jngraham v. Wright, supra, at 664, and

the text is explicit that bail and fines may not be

excessive. It would be anomalous indeed if the lesser

punishment of a fine and the greater punishment of

death were both subject to proportionality analysis,

but the intermediate punishment of imprisonment

28 See Coker v. Georgia, 433 U.S. 584 ( 1977) (death sentence heid to be

grossly disproportionate and excessive for the crime of rape); Trop v. Dulles,

35 U.S. 92 (1958) (expatriation for wartime desertion violated the Eighth

Amendment); Enmund v. Florida, 458 U.S. 782 (1982) (death penalty for

felony murder held to be excessive under the circumstances); Gregg v.

Georgia, 428 U.S. 153 (1976) (death denalty for murder upheld ).

3° In so holding, the Court weighed the gravity of the offense and the

harshness of the penalty, and looked to the sentences imposed for similar

conduct in the same and other jurisdictions, stating that “[i]f more serious

crimes are subject to the same penalty, or to less serious penalties, that is some

indication that the punishment at issue may be excessive.” Jd at 291.

Applying the considerations enunciated in Solem, a punitive award, 2,100

times the amount of actual damages, is obviously excessive and grossly

disproportionate to the offense of bad faith failure to pay an insurance claim.

Moreover, consideration of the fines allowed for violation of the Alabama

Insurance Code, which proscribes a general practice of refusing to pay or

settle claims, removes all doubt that the award here was excessive. Section

27-1-12 of the Alabama Code provides that a willful violation of the statute is

punishable, at most, by a $1,000 fine. See Ala. Code § 27-1-12 (1975).

23

were not. There is also no historical support for such

an exception.

Solem v. Helm, 463 U.S. at 289.

The governing principle of proportionality as a protection

against arbitrariness and excessiveness in punishment compels

reversal of the award of $3.5 million against Aetna for the

“offense” of paying only a portion, rather than the whole, of a

$3,000 insurance .iaim. The award of $3.5 million in punitive

damages against Aetna was rendered in a proceeding which

failed to comport with due process, and which permitted the

jury to award punitive damages in an amount which was

arbitrary and wholly disproportionate to the offense charged."

The complete absence of standards for assessing punitive

damages (an infirmity which would not survive in other

criminal contexts ) has led inevitably to a proliferation of similar

punitive awards—a result which the Eighth Amendment pro-

scribes.

Despite the magnitude of the punitive damages award

assessed against Aetna, the court below concluded that “the

verdict is [not] so excessive as to warrant a finding that it was

based upon bias, passion, prejudice or some other improper

motive.” Jurisdictional Statement, App. A at 35a. To call the

verdict below anything but excessive, however, rejects the

concept of proportionality, and gives open-ended indulgence to

the sort of judge or jury passion that inflates such awards. By

upholding an award of $3.5 million in punitive damages—a

punishment that is over 2,100 times the amount of actual

Significantly, this Court, reviewing the role of the jury in meting out

criminal sentences, has emphasized the importance of providing proper

guidance to juries to protect against arbitrary and discriminatory sentences.

See Gregg v. Georgia, 428 U.S. at 189 (“discretion must be suitably directed

and limited so as to minimize the risk of wholly arbitrary and capricious

action”). Although guidance has traditionally been provided to juries

assessing punishment in criminal contexts, no similar guidance—or, at least,

no useful guidance—has been rendered by courts to juries vested with the

power to assess punitive damages.

24

damages allegedly suffered—the court below has sanctioned a

scheme of punishment which bears no rational relation to the

offense charged.32 Such punishment should not be upheld

under the plain words and purposes of the Eighth Amendment.

32 This Court has held a fine of $3.5 million to be excessive. In United

States v. United Mine Workers, 330 U.S. 258, 304-05 (1947), this Court

concluded that an unconditional fine of $3.5 million against a union for

criminal contempt was excessive, in light of the character of the defendant’s

conduct, the effectiveness of the sanction, the financial resources of the

defendant and the burden imposed upon the defendant. The Court reduced

the fine to $700,000, with an additional fine of $2,800,000 payable if the

defendant persisted with its noncompliance with a restraining order.

, SS =

25

CONCLUSION

For the reasons set forth above and for the additional

reasons advanced in the Brief for the Appellant, the decision

below should be reversed.

Of Counsel:

Jack H. BLAINE

Vice President, State Relations,

and General Counsel

EDWARD J. ZIMMERMAN

Senior Associate General Counsel

AMERICAN COUNCIL OF LIFE

INSURANCE

1850 K Street, N.W.

Washington, D.C. 20006-2284

(202) 862-4000

Jor W. PEEL

Vice President and

General Counsel

JOHN P. DINEEN

Assistant General Counsel

HEALTH INSURANCE ASSOCIATION

OF AMERICA

919 Third Avenue

28th Floor

New York, New York 10022

(212) 486-5578

AUGUST, 1985

Respectfully submitted,

Erwin N. GRIswoL_D

(Counsel of Record)

THomaS F. CULLEN, Jr.

PaTRICiIA A. DUNN

Jones, Day, Reavis & POGUE

655 15th Street, N.W.

Washington, D.C. 20005-5701

(202) 879-3939

Counsel for Amici