Amicus Curiae Brief — Union Security Life Insurance v. Crocker

In THE

Suprene Court of the United States

OCTOBER TERM, 1995

UNION SECURITY LiFe INSURANCE Co.,

Petitioner,

Vv.

EVELYN CROCKER,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Alabama

BRIEF AMICUS CURIAE FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITION

Of Counsel: PATRICIA A. DUNN

PHILLIP E. STANO Counsel of Record

AMERICAN COUNCIL OF HARkY I. JOHNSON, III

LIFE INSURANCE JONES, DAY, REAVIS & Pocus

1001 Pennsylvania Ave.,N.W. 1450 G Street, N.W.

Washington, D.C. 20004 Washington, D.C. 20005

(202) 624-2188 (202) 879-8989

Counsel for the Amicus

WILSON - Erne Printing Co., Inc. - 789-0006 - WasHINGTON, D.C. 20001

QUESTION PRESENTED

Whether the $2 million punitive exaction in this case,

which is at least 137 times the economic harm suffered by

respondent, is so grossly excessive as tc violate the Due

Process Clause of the Fourteenth Amendment.

(i)

TABLE OF CONTENTS

QUESTION PRESENTED ....... allie adenssbittitinteventonegnes

TABLE OF AUTHORITIES. .........2....22--:-c-cecceeeeeeeeeeeeenees

INTERESTS OF THE AMICUS. ...........20--.---cceceeeeeee- ;

REASONS FOR GRANTING THE WRIT ..............

I. THIS CASE PRESENTS THE SAME IMPOR-

IT.

TANT CONSTITUTIONAL QUESTIONS CON-

CERNING THE EXCESSIVENESS OF PUNI-

TIVE DAMAGES THAT WERE PRESENTED

IN GORE AND SHOULD, AT A MINIMUM,

BE HELD FOR DISPOSITION IN LIGHT OF

GORE ....... Me a AREA. GEN EAE SS PR

IN THE EVENT THAT THESE RECURRING

AND IMPORTANT CONSTITUTIONAL IS-

SUES EVADE DEFINITIVE RESOLUTION

IN GORE, THIS CASE PRESENTS AN EX-

CELLENT OPPORTUNITY FOR THE COURT

TO ADDRESS THE EXCESSIVENESS ISSUE..

A. The Current Confusion Regarding Due Proc-

ess Limitations On Punitive Damages Awards

Will Continue Absent This Court’s Definitive

Resolution Of The Excessiveness Issue In

a

B. The Alabama Courts’ Justifications For Up-

holding The $2 Million Punitive Award

Against Union Security Clearly Fail To

Establish A Reasonable Relationship Be-

tween The Punitive Exaction And The Goals

Of Punitive Damages ...............-.--.c.c--c0-cecceneoeee

(iii)

iv

TABLE OF CONTENTS—Continued

1. The Alabama Supreme Court’s Award Of

Punitive Damages Against Union Secur-

ity On The Basis Of Its Lawful Conduct

Serves Neither Punishment Nor Deter-

2. The Alabama Supreme Court’s And Trial

Court’s Award Of Punitive Damages

Against Union Security On The Basis Of

Its Nationwide Profit On All Sales Of

Credit Life Insurance Serves Neither

Punishment Nor Deterrence .......................

3. The Alabama Supreme Court’s And Trial

Court’s Award Of Punitive Damages

Against Union Security On The Basis Of

Respondent’s Unspecified, Unsupported

Failed “Expectations” Serves Neither

Punishment Nor Deterrence ......................

C. Measurable, Objective Standards Exist For

Determining Whether A Punitive Award

Reasonably Relates To The Goals Of Punish-

ment And Deterrence ...000000.00000000.ccec cece ecco

4. BEC R Se SEW Ee a oe ere BIRO ew mee ee

Page

11

15

16

v

TABLE OF AUTHORITIES

CASES Page

Aetna Life Ins. Co. v. Lavoie, 475 U.S. 818 (1986) .. 2

BMW v. Gore, 646 So.2d 619 (Ala. 1994) (per

curiam), cert. granted, 115 S.Ct. 982 (1995) .....1, 11, 13

Bankers Life & Casualty Co. v. Crenshaw, 486 U.S.

Fa. CRD iia dekh tncheeiitthhepindeceloitltectieadtbttaiis tocesnes 1

Bordenkircher v. Hayes, 434 U. S. 857 (1978) ......... 10

Bouie v. City of Columbia, 378 U.S. 347 (1963) .... 10

Browning-Ferris Indus. v. Kelco Disposal, Inc., 492

8 RR) Se TS A a ae oa a 1

Green Oil v. Hornsby, 539 So.2d 218 (Ala. 1989) .... 8

Hammond v, City of Gadsden, 493 So.2d 1374 (Ala.

yp) Pe etme es hs DN RR Red Peo RN ee I 4

Hanson v. American Nat’l Bank & Trust Co., 865

SF & 85 | PR ee 7

Hawkins v. Allstate Ins. Co., 733 P.2d 1073

(Ariz.), cert. denied, 48° U.S. 874 (1987) ........... 11

Honda Motor Co. v. Oberg, 114 S.Ct. 2331 (1994).. 1

Huff v. United Ins. Co. of America, 1995 WL

317676 (Ala., May 26, 1995) .................-.-..0..--200+ 5, 9, 10

Intercontinental Life Ins. Co. v. Lindblom, 571

So.2d 1092 (Ala. 1990), vacated, 499 U.S. 956

(1991), op. reinstated, 598 So.2d 886 (1992),

cert. denied, 113 S.Ct. 200 (1992) ..............22...... 11,138

In re Northern Dist. of Calif. “Dalkon Shield” IUD

Prod. Litig., 526 F. Supp. 887 (N.D. Cal. 1981),

vacated, 693 F.2d 847 (9th Cir. 1982), cert. de-

OE Fe aes Se CED iererekeennsnttbnctcimanemniccinpaciins 15

Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1

a eh ceutchinmmeall passim

Phillips Petroleum Co. v. Shutts, 472 U.S. 797

SPW aie anette RS AE: ella tS RET 12

TXO Prod. Corp. v. Alliance Resources Corp., 113

ee re a nn edesateion 1,17

STATUTES AND REGULATIONS

Ala. Ins. Reg. No. 28, § VI(J) (2) ........-.............. 2,10, 14, 18

Mo. Rev. Stat. § 385.070(d) (1994) ....000 12

Nev. Rev. Stat. Ann. § 230(3) (1998) -...........000......... 12

N.C. Rev. Stat. Ann. § 58-57-25 (c) (2) (1995) ....... 12

vi

TABLE OF AUTHORITIES—Continued

MISCELLANEOUS

D. Ellis, Punitive Damages, Due Process, and the

Jury, 40 Ala. L. Rev. 975 (1989) -......0...20..--022..

D. Owen, Punitive Damages in Products Liability

Litigation, 74 Mich, L. Rev. 1258 (1976) ............

D. Owen, The Moral Foundations of Punitive Dam-

ages, 40 Ala. L. Rev. 705 (1989) -.........0....--..2--.-.

R. Stern, E. Gressman, S. Shapiro & K. Geller,

Supreme Court Practice (7th ed. 1998) ..............

BRIEF AMICUS CURIAE FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITION

INTERESTS OF THE AMICUS'

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

the largest life insurance trade association in the United

States. ACLI represents the interests of more than 600

member life insurance companies; these companies cur-

rently underwrite 91 percent of the life insurance in force

in legal reserve life insurance companies in the United

States.

Defining the procedural and substantive limitations that

the Due Process Clause of the Fourteenth Amendment im-

poses on punitive damages is an issue of vital importance

to the amicus’ members. In recent years, courts have per-

mitted juries to assess substantial punitive damages awards

against insurers and have deferred to those awards even

though they are imposed without meaningful standards

and bear no rational relationship to the purposes of pun-

ishment and deterrence. These decisions drastically and

unpredictably enlarge the risks facing insurers, which must

rely on a predictable allocation 7 risks and costs in pro-

viding insurance, and jeopardize their ability to offer

affordable insurance.

One such decision, in which ACLI has also filed an

amicus brief, is currently being reviewed by this Court in

BMW vy. Gore, No. 94-896 (“Gore’’). Due to its genuine

interest in the constitutionality of current punitive dam-

ages law, the amicus has also filed briefs in this Court in

prior cases involving this issue. See, e.g., Honda Motor

Co. v. Oberg, 114 S.Ct. 2331 (1994); TXO Prod. Corp.

v. Alliance Resources Corp., 113 S. Ct. 2711 (1993);

Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991);

Browning-Ferris Indus. v. Kelco Disposal, Inc., 492 U.S.

257 (1989); Bankers Life & Casualty Co. v. Crenshaw,

! Counsel for both the Petitioner and the Respondent have con-

sented to the filing of this brief. Their consents are on file with

the Clerk.

2

486 U.S. 71 (1988); Aetna Life Ins. Co. v. Lavoie, 475

U.S. 813 (1986).

This brief presents to the Court the view of the amicus,

based on the experience of its broad-based constituents,

concerning the importance of the Court’s intervention in

this case—a case that, perhaps better than any other case

previously before this Court, squarely presents the con-

stitutional problems with excessive punitive damages

awards.

STATEMENT

1. Petitioner Union Security Life Insurance Company

(“Union Security”) sells, among other products, credit

life insurance. This insurance pays off the balance of a

loan where the insured debtor dies during the term of

the loan. Pet. 2. During the period relevant to this case,

First Alabama Bank (“First Alabama”) and its branch

at Choctaw (“First Alabama, Choctaw”) were authorized

to sell group credit life policies on behalf of Union Se-

curity. Pet. 2.

Union Security required that all individuals seeking

credit life insurance for amounts over $10,000 fill out a

“Statement of Debtor’s Physical Condition” (hereinafter

“Health Statement”). Pet. 2. The form, as it existed at

the relevant time, asked whether the debtor had experi-

enced a variety of health conditions over the preceding

five years. Pet. 2. Among the listed conditions were

“heart disease” and “nervous disorder.” Pet. 2-3. It was

and is Union Security’s uniform policy to deny insurance

to any applicants who acknowledge that they had experi-

enced one of the listed conditions. Pet. 3.

If the insured debtor dies within the contestability pe-

riod of one year that is permitted under Alabama law,”

2 The contestability period is the period of time during which

the insurance company may dispute coverage on the basis that the

policyholder made a material misstatement in his/her policy ap-

plication. Alabama insurance regulations set this period at one year

for credit life insurance policies. See Ala. Ins. Reg. No. 28,

§ VI(J) (2).

3

and dies from a condition apparently covered by the

Health Statement, Union Security's uniform policy is to

investigate whether the policyholder’s Health Statement

contained material inaccuracies. Pet. 3-4. If Union Se-

curity learns that the cause of death actually was an un-

disclosed pre-existing Health Statement condition, it de-

nies the claim and returns the premium to the policyhold-

er’s representative. Pet. 4. Otherwise, it pays the claim

without further inquiry. Pet. 4-5. Union Security only

rarely denies a group credit life claim on the basis of

such nondisclosure; these denials have occurred for under

one percent of all of Union Security’s group credit life

Claims. Pet. 4.

2. Respondent Evelyn Crocker, together with her hus-

band, Coleman Crocker, purchased a group credit life

insurance policy in conjunction with a loan from First

Alabama, Choctaw in October 1990. Pet. 5. For years

prior to buying the policy, Mr. Crocker had suffered from

heart disease and Parkinson’s Disease. Pet. 4-5.

Samuel Taylor, an employee of First Alabama, Choc-

taw, sold the Crockers the group life policy. Taylor filled

out the Health Statement for each of the Crockers, indi-

cating on the statement that neither had any of the listed

medical conditions. Pet. 6. After having an opportunity

to review his Health Statement, Mr. Crocker signed it.

even though it inaccurately reflected that he had not suf-

fered from heart disease or a nervous disorder. /d.

Mr. Crocker died of heart disease approximately nine

months after the closing on his loan and the signing of his

Health Statement. Pet. 8. Mrs. Crocker then made a

claim for the loan balance. Because Mr. Crocker had

died within the one-year contestability period and because

the cause of death was a medical condition listed in the

Health Statement, Union Security acted in accordance

with its policy and investigated Mrs. Crocker’s claim. /d.

After learning from Mr. Crocker’s doctor that Mr.

Crocker was suffering from heart disease at the time he

signed the Health Statement, Union Security denied Mrs.

Crocker’s claim and refunded Mr. Crocker’s premium. /d.

4

3. Following Mr. Crocker’s death, Mrs. Crocker

stopped making payments on the loan and filed suit in

Choctaw County court against Union Security, First Ala-

bama, and First Alabama, Choctaw. Pet. 8. Mrs. Crock-

er’s amended complaint alleged, inter alia, that Taylor,

as an agent of both First Alabama and Union Security,

had fraudulently “concealed” from the Crockers that he

had disclosed inaccurate information on the Health State-

ment, that they had to be in good health to get the credit

life policy, and that, if Mr. Crocker were to die of heart

problems or a nervous disorder, coverage would be de-

nied. Pet. 9. Only these fraud claims went to trial, as

the trial court dismissed the breach of contract and bad

faith claims against Union Security. Pet. App. la.

At trial, no evidence was presented that Union Se-

curity had authorized Taylor or any other agent to fill out

Health Statements inaccurately or to conceal the fact that

inaccuracies on a Health Statement could result in the

denial of a claim. Pet. 6, note 7. Instead, Mrs. Crocker’s

attorneys laced their questioning and argument with evi-

dence of Union Security’s out-of-state location, foreign

ownership, substantial aggregate premiums, and other ir-

relevant facts. Pet. 9-10. After deliberating for little

more than a half-hour, the jury returned a general verdict

holding the defendants jointly and severally liable for $5

million on the fraud theory. Pet. App. 1a-2a.

The trial court, after conducting a post-trial evidentiary

hearing under Hammond vy. City of Gadsden, 493 So.2d

1374 (Ala. 1986), sustained the jury’s finding of fraud,

but granted a reznittitur of $2 million in punitive dam-

ages. The trial court concluded that the $3 million puni-

tive damage award against Union Security was not ex-

cessive, even though the trial court acknowledged that Un-

ion Security's liability was entirely vicarious and, even

then, was an “isolated incident” rather than part of a pat-

tern of conduct. Pet. App. 20a, 23a. The trial court

further concluded that $3 million was not excessive be-

cause Union Security had realized a net gain of $1.29

million from the sale of credit life insurance nationwide

5

and because Mrs. Crocker suffered “grievous” harm from

the failure of the Crockers’ bargained-for “expectations”

under the policy. Pet. App. 20a.

Both defendants filed notices of appeal. First Alabama,

Choctaw entered into a pro tanto settlement with Mrs.

Crocker that released First Alabama for $1 million. After

learning of the settlement, Union Security successfully

moved for a remand to the trial court for purposes of

determining whether the $2 million that remained of the

judgment was excessive in relation to Union Security’s

conduct. Pet. 12. Refusing to conduct a new hearing, the

trial court issued a short order effectively holding that

$2 million was not excessive as to Union Security. Pet.

App. 28a-3 1a.

The Alabama Supreme Court affirmed the trial court’s

decision in all respects. The Alabama Supreme Court

agreed that a $2 million punishment for Union Security

was not excessive as it was an “amount necessary .. .

in order to exorcise fraud and inequity from the marketing

of credit life insurance policies.” Pet. App. Ila-12a. In

this regard, the Alabama Supreme Court held Union Se-

curity’s marketing practices inequitable and deserving of

punitive damages on the sole basis of language in a freshly-

minted, unreported 1995 opinion, Huff v. United Ins. Co.

of America, 1995 WL 317676 (Ala., May 26, 1995),

decided more than three-and-a-half years after the Crock-

ers’ policy was issued. Pet. 13-14.

REASONS FOR GRANTING THE WRIT

I. THIS CASE PRESENTS THE SAME IMPORTANT

CONSTITUTIONAL QUESTIONS CONCERNING

THE EXCESSIVENESS OF PUNITIVE DAMAGES

THAT WERE PRESENTED IN GORE AND

SHOULD, AT A MINIMUM, BE HELD FOR DIS-

POSITION IN LIGHT OF GORE.

In many respects, the issues in Crocker are mirror

images of those in Gore, where this Court is reviewing

whether a $2 million punitive damages award is so ex-

cessive as to violate due process under the Fourteenth

6

Amendment. Like Gore, this case raises the same broad

and recurring question: what is the “constitutional cal-

culus” for deciding whether an award of punitive dam-

ages is grossly excessive and without a reasonable relation-

ship to punishment and deterrence? See, e.g., Haslip, 499

U.S. at 22 (1991) (to satisfy the requirements of the

Due Process Clause, punitive damages standards must

“provide for a rational relationship in determining whether

a particular award is greater than reasonably necessary

to punish and deter”). And, like Gore, this case presents

a number of related issues that warrant this Court’s reso-

lution, either in Gore or here, including the recurrent

problems of using punitive damages awards to punish for

lawful extraterritorial conduct, punish for conduct con-

temporaneously lawful within Alabama, and punish on the

basis of a corporate practice undertaken for legitimate

business reasons.

The significance of these constitutional questions

prompted the Court to grant certiorari in Gore. Because

the determination of constitutional excessiveness here de-

pends on the Court's holding in Gore, this case should,

at a minimum, be held for disposition in light of the

resolution of Gore. See R. Stern, E. Gressman, S. Shapiro

& K. Geller, Supreme Court Practice §§ 4.16, 5.9 (7th ed.

1993).

Il. IN THE EVENT THAT THESE RECURRING AND

IMPORTANT CONSTITUTIONAL ISSUES EVADE

DEFINITIVE RESOLUTION IN GORE, THIS CASE

PRESENTS AN EXCELLENT OPPORTUNITY FOR

THE COURT TO ADDRESS THE EXCESSIVENESS

ISSUE.

A. The Current Confusion Regarding Due Process Lim-

itations On Punitive Damages Awards Will Continue

Absent This Court’s Definitive Resolution Of The

Excessiveness Issue In Gore Or In This Case.

If the Court does not decide to address the full scope

of the excessiveness issue in Gore, it should do so in

Crocker. Both cases amply dramatize that punitive dam-

ages have indeed exceeded any legitimate bounds and

7

“run wild.” Haslip, 499 U.S. at 18. Gore involves a

judicially-sanctioned $2 million punishment for failing to

disciose that a physician's BMW had undergone a paint

job that affected its value, by at most, $4,000. This case,

perhaps more egregious than Gore, involves a judicially-

sanctioned $3 million punishment for an insurer’s failure

to pay a $14,563 claim under an insurance policy that

was procured through the applicants’ fraud.

To be sure, this Court has already declared that “gen-

eral concerns of reasonableness . . . properly enter into

the constitutional calculus” in determining whether an

award is unconstitutionally excessive. Haslip, 499 U.S. at

18. Yet, the Court has not specifically identified what cri-

teria or factors are indicators of unreasonable excessiveness.

Unless the Court elucidates the criteria for measuring

punitive awards for unconstitutional excessiveness, lower

courts will continue to address punitive damages awards

without meaningful, objectively-measurable criteria for de-

ciding whether a particularly large punitive damages award

is unconstitutionally excessive, i.e. not reasonably related

to punishment and deterrence. The current lottery-like

system of large punitive awards will continue unrestrained

—with no real assurance to defendants that their consti-

tutional rights to due process will be protected—unless

this Court intervenes with meaningful criteria for judicial

review of the constitutionality of punitive awards. See,

e.g., Hanson v. American Nat'l Bank & Trust Co., 865

S.W.2d 302, 310 (Ky. 1993) (affirming $5.75 million

award while stating that Haslip “did not identify the pa-

rameters [state courts] should apply in insuring that an

award of punitive damages meets the test of due process”).

B. The Alabama Courts’ Justifications For Upholding

The $2 Million Punitive Award Against Union Se-

curity Clearly Fail To Establish A Reasonable Re-

lationship Between The Punitive Exaction And The

Goals Of Punitive Damages.

This Court has repeatedly stated, in its due process

jurisprudence, that punitive damages awards greater than

reasonably necessary to punish and deter are unconstitu-

tional. See Haslip, 499 U.S. at 21-22 (allowing awards

greater than necessary to punish and deter is unconstitu-

tional). Punitive damages awards that are greater than

reasonably necessary to punish and deter are those that

bear no reasonable relationship to punishing or deterring

the conduct at issue. /d. These awards fail to serve pun-

ishment or deterrence, the ultimate goals of all punitive

awards, either by inflicting disproportionate punishment

on an offender or by overdeterring or underdeterring fu-

ture offenders.

The Alabama Supreme Court's and trial court’s primary

justifications for the size of Union Security’s $2 million

share of the punitive award were (i) the “inequity” of

Union Security's post-claim investigation policy, (ii) its

nationwide profits from the sale of credit life policies, and

(iii) its supposed denial of bargained-for “expectations”

never pled or proven at trial.’ None of these justifications

is rationally related to the goals of punishment and deter-

rence, and they demonstrate vividly that Union Security’s

$2 million share of the $3 million award is constitutionally

excessive.‘ Indeed, the award is at least 68 times the

actual and potential harm to the respondent, at least 2,400

times Union Security's profit, and at least 57 times the

’ Under Alabama law, the trial court was required to judge the

reasonableness of the jury’s award by seven factors under Greer

Oil v. Hornsby, 589 So. 2d 218 (Ala. 1989). Several Green Oil

factors were not relied on heavily by the tria! court or the Ala-

bama Supreme Court to justify the $3 million size of the post-

remittitur award. These were (i) the degree of reprehensibility

of the defendant’s conduct, (ii) the costs of litigation (the trial

court only mentioned that the attorneys should recover a “signifi-

cant” amount beyond their $35,000 fee, see Pet. App. 22a), (iii)

the imposition of criminal sanctions, and (iv) the imposition of

other punitive damages awards. Pet. App. 19a-24a.

The trial court rested on its original analysis when it declined

to hold Union Security’s $2 million share of the award excessive.

Pet. App. 3ia.

4 Hereinafter, the brief refers to Union Security’s $2 million

share of the punitive award as the “award.”

9

respondent's litigation costs. These amounts clearly ex-

ceed the four-to-one ratio that this Court, in Haslip,

deemed “close to the line” of constitutional excessiveness.

Haslip, 499 U.S. at 23.

1. The Alabama Supreme Court’s Award Of Puni-

tive Damages Against Union Security On The

Basis Of lis Lawful Conduct Serves Neither

Punishment Nor Deterrence.

The Alabama Supreme Court justified the amount

of punitive damages against Union Security because it was

“necessary . . . in order to exorcise fraud and inequity

from the marketing of credit life policies.” Pet. App. 1 la-

12a. Specifically, in affirming the trial court’s judgment,

the Alabama Supreme Court found punishable Union

Security’s limited use of post-claim, rather than pre-claim,

health investigations—a practice that was entirely lawful

under Alabama law at the time Union Security applied

it to respondent’s claim. /d. Indeed, as the Alabama Su-

preme Court’s opinion makes clear, the supposed “in-

equity” of this conduct was first elucidated in Alabama in

the 1995 Huff case.” Id.

Essentially, the Alabama Supreme Court punished Un-

ion Security for its 1991 conduct on the basis of a 1995

decision in another case against another defendant more

than three-and-a-half years later. As the Huff court ac-

knowledged, post-claim health investigations were entirely

permissible and unobjectionable before Huff was handed

down in May 1995:

As the law in Alabama currently stands, an insur-

ance company may issue a life insurance policy with

5 Other striking evidence exists that the Alabama Supreme Court

went to any length to characterize Union Security’s conduct as

wrongful. The cause of action that would normally encompass in-

tentionally wrongful investigatory conduct by Union Security, the

bad faith claim, had already been dismissed by the trial court.

Pet. App. la. Despite this, the Alabama Supreme Court declared

Union Security’s investigation policy inequitable.

10

its knowledge of its applicant’s health coming solely

from its agent’s questioning of the applicant about

his or her health history.

Huff, 1995 WL 317676, at *2 (emphasis added). In

fact, because the Huff court declined to make such con-

duct evidence of fraud, and Alabama regulations still ex-

plicitly permit credit life contestability within one year,

these investigations remain lawful in Alabama. See Huff,

1995 WL 317676, at *3 (summary judgment for insurer

affirmed); Ala. Ins. Reg. No. 28, § VI(J)(2).

Assessing punitive damages against a defendant for

conduct that is lawful when that conduct occurs clearly

serves neither the goal of punishment nor the goal of de-

terrence. This Court has recognized that punishment is

fundamentally unfair when it is based on lawful conduct.

See, e.g., Bordenkircher v. Hayes, 434 U.S. 357, 363

(1978) (“To punish a person because he has done what

the law plainly allows him to do is a due process violation

of the most basic sort. . . .”) (citation omitted); Bouie v.

City of Columbia, 378 U.S. 347, 352 (1964) (judicial

construction that retroactively enlarges statute, making

conduct illegal that was clearly outside prohibition of sta-

tute, violates due process). Simply put, no culpability

deserving of punishment can exist where a party has no

wrongful intent, reasonably believing that its conduct is

lawful because the conduct is, at the time, lawful.

Punishing for lawful conduct likewise fails to serve the

goal of deterrence. To be effective, deterrence requires

that the potential wrongdoer be able to recognize what

type of conduct is prohibited. D. Owen, Punitive Dam-

ages in Products Liability Litigation, 74 Mich. L. Rev.

1258, 1283 (1976). That party then is able to avoid en-

gaging in the type of conduct that is prohibited, i.e., it can

successfully be deterred from the prohibited conduct. /d.

But, where certain conduct is legal when undertaken, no

one can possibly recognize the conduct as prohibited,

avoid the conduct, and thus be deterred from it. Punish-

li

ing Union Security for abiding by its contemporaneously

lawful post-claim investigation policy sends no meaningful

message of deterrence to any potential defendant; it sim-

ply sends the message that Alabama courts may sustain

large punitive damages awards by arbitrarily and retro-

actively labelling lawful conduct as “inequitable.”

Such retroactive, aggregate punishment on the basis of

ordinary business practices is a recurring problem, in

Alabama and elsewhere, and should be addressed. See,

e.g., BMW v. Gore, 646 So.2d 619 (Ala. 1994) (per

curiam) ($2 million punitive award for uniform repair

non-disclosure policy), cert. granted, 115 §. Ct. 932

(1995); Intercontinental Life Ins. Co. v. Lindblom, 571

So.2d 1092 (Ala. 1990) (close to $1 million punitive

award for practice of allowing premium grace period),

vacated, 499 U.S. 956 (1991), op. reinstated, 598 So.2d

886, cert. denied, 113 S. Ct. 200 (1992); Hawkins v.

Allstate Ins. Co., 733 P.2d 1073, 1077, 1083 & n9

(Ariz.) ($3.5 million punitive award based on standard

policy of subtracting a cleaning fee of $35 from the es-

timated value of total loss vehicles), cert. denied, 484

U.S. 874 (1987). This case presents a compelling oppor-

tunity for this Court to do so.

2. The Alabama Supreme Court’s And Trial Court’s

Award Of Punitive Damages Against Union Se-

curity On The Basis O7 Its Nationwide Profit On

All Sales Of Credit Life Insurance Serves Neither

Punishment Nor Deterrence.

a. The Extraterritoriality Problem. The courts below

held that the punitive damages award in this case was

appropriate, in part, because Union Security realized a

$1.29 million nationwide profit from the sale of credit

life insurance. Pet. App. lla-12a, 2ia. The trial court

stated, and the Alabama Supreme Court affirmed, that it

was appropriate, under the Green Oil factors, to remove

this profit. Jd. They did so even though respondent had

adduced no evidence that either the sale of credit life in-

12

surance or post-claim investigations were illegal or consid-

ered wrongful in Alabama, much less the forty-nine states

besides Alabama.* In fact, like Alabama, a vast majority

of states consider legal both the sale of credit life insur-

ance and the contestability of credit life claims, though

some states, like Alabama, limit the time during which an

insurer may contest a credit life claim. See, e.g., Mo. Rev.

Stat. § 385.070(d) (1994) (Missouri allows contestabil-

ity of credit life for two years); Nev. Rev. Stat. Ann.

§ 690A.230(3) (1993) (Nevada allows contestability of

credit life); N.C. Gen. Stat. § 58-57-25(c)(2) (1995)

(North Carolina allows contestability of credit life for

two years).

Awarding punitive damages based on conduct lawful

outside the punishing jurisdiction obviously fails to serve

the punishment goal. Alabama clearly has no rational in-

terest in punishing defendants in other states who carry

out their conduct in compliance with those states’ laws. In

punishing Union Security on the basis of its profits earned

in forty-nine other states, Alabama seriously infringes upon

these states’ sovereignty. See Phillips Petroleum Co. v.

Shutts, 472 U.S. 797, 814-822 (1985) (due process vio-

lated where one state applies its law to a series of transac-

tions, the vast majority of which have no connection with

the state). It also defies fundamental principles of fairness

under the Due Process Clause.

Nor can Alabama possibly have a rational interest in

deterring the sale of credit life insurance or the contest-

®In addition, the trial court confusingly considered the overall

sale of credit life insurance to be the appropriate “wrongful con-

duct” for gauging the defendant’s profit, Pet. App. 21a, while the

Alabama Supreme Court later found the investigation and denial

of credit life claims to be this “wrongful conduct.” Pet. App. 1la-

12a. However, whether the practice of selling credit life insur-

ance or the practice of post-claim investigation was considered

“wrongful conduct,” punishing for such conduct outside of Ala-

bama serves neither the goal of punishment nor the goal of de-

terrence.

13

ability of credit life claims within other states. If the

states properly with authority to regulate a practice con-

sider it lawful, they have necessarily determined that the

practice should not be deterred, and another state can

have no rational interest in deterring inat lawful out-of-

state conduct. Awarding punitive damages based on con-

duct that other states deem lawful plainly overserves any

rational deterrent purpose and is excessive.

b. The Aggregation Problem. This case reveals a chill-

ing thread that runs through the Alabama courts’ punitive

damages decisions. Alabama courts are willing to permit

calculation of punitive damage awards simply by aggre-

gating “profit” gained under a common, nationwide cor-

porate practice or policy—without regard to the lawful-

ness or intent behind that practice or policy. See, e.g.,

Gore; Lindblom, supra. Allowing large punitive damages

awards to stand because the corporate defendant hap-

pened to have a lawful, standardized procedure or prac-

tice has no rational connection with the goals of punish-

ment and deterrence.

First, this case is even more extreme than Gore in dem-

onstrating that basing punitive damages on “profit” from

lawful, business-justified nationwide practices, as calcu-

lated by the Alabama courts under Green Oil, has no ra-

tional relationship to punishment. Here, not only was the

$2 million punitive award approved largely on the basis

that Union Security had a common corporate practice of

selling credit life insurance, or of post-claim investigation,

(see note 6, supra), but the Alabama courts punished Un-

ion Security on this basis despite the trial court’s finding

that the alleged wrongful conduct (Taylor's purported mis-

representation) was “an isolated incident’ not attributable

to any overall policy or practice of Union Security. Pet.

App. 20a, 23a. Regardless of this factual finding, both

the trial court and Alabama Supreme Court measured

damages on the basis of “profit” from a corporate practice

or practices that the trial court had acknowledged were

14

largely, if not wholly, irrelevant to the allegedly wrongful

conduct at issue.

The mere fact that a defendant has a standardized prac-

tice, of course, does not make it more culpable and de-

serving of punishment. This is especially true where, as

here, the standardized practices—Union Security’s nation-

wide sale of credit life insurance and/or its uniform policy

of post-claim investigation—were, at most, tangentially

related to the issue in the trial court: the alleged unau-

thorized acts of a single agent. Standardized corporate

policies may, as in this case, simply be required by econo-

mies of scale necessary for the company to make any

profit at all. See Pet. 16 n.14, 18 (where Union Se-

curity’s profit margin may be as low as 6%, it would be

uneconomical to pre-investigate every Health Statement).

There was no demonstration of culpable intent in Union

Security’s adopting such a policy.

Second, calculating punitive damages on an overall

“profit” basis bears no rational relationship to deterrence.

The Alabama courts, in upholding this award, ignore that

the inevitable effect of awarding punitive damages far in

excess of the defendant’s entire nationwide profit from a

business enterprise is to force any rational defendant to

stop engaging in that enterprise. Because Union Security

profits only $1.29 million from the sale of credit life,

the $2 million punitive damages award arising out of a

single credit life transaction—one of thousands of credit

life transactions each month—wipes out its entire nation-

wide profit. Instead of deterring insurance companies

from engaging in a certain type of conduct—such as giv-

ing non-employee agents discretion to sell policies or fail-

ing to provide conspicious written notice that false insur-

ance applications could result in denial of ciaims—such

punitive awards will overdeter by giving insurance com-

panies the incentive to leave the credit life business com-

pletely. Even Alabama has recognized credit insurance

as a worthwhile pursuit, see, e.g., Ala. Ins. Reg. No. 28

15

(allowing credit life insurance under scheme of regula-

tion), and destroying that business obviously serves no ra-

tional deterrence goal. See, e.g., In re Northern Dist. of

Calif. “Dalkon Shield” IUD Prod. Litig., 526 F. Supp.

887, 899 (N.D. Cal. 1981) (purpose of punitive damages

is to sting, not kill, defendant), vacated on other grounds,

693 F.2d 847 (9th Cir. 1982), cert. denied, 459 US.

1171 (1983).

3. The Alabama Supreme Court’s And Trial Court’s

Award Of Punitive Damages Against Union Se-

curity On The Basis Of Respondent’s Unspeci-

fied, Unsupported Failed “Expectations” Serves

Neither Punishment Nor Deterrence.

The trial court found, and the Alabama Supreme Court

affirmed, that the $2 million punitive award was justified

because the respondent’s bargained-for “expectations” had

“totally failed.” Pet. App. 1la-12a, 20a. The trial court

never explained why it considered relevant Mrs. Crocker’s

bargained-for “expectations” after it had dismissed the

breach of contract claim against Union Security. Pet.

App. la. Nor did the trial court explain how these expec-

tations could be any greater in amount than the value of

the insured loan, even as it awarded punitive damages

greater than 137 times the loan balance. Pet. App. 20a.

In sum, the failed “expectations” were a chimera in the

trial court’s Green Oil analysis, used to create a reason-

able relationship between the respondent’s harm and the

size of the punitive award, when, in fact, there was rone

at all.

Assessing punitive damages on the basis of an entirely

subjective, unproven phenomenon, like the supposed

failed “expectations” in this case, clearly fails to serve

the goals of punishment and deterrence. The basis of

punishment cannot be insusceptible of calculation and a

potentially unlimited bootstrap for liability, as it was in

this instance, and rationally serve the goal of punishment.

Of course, where punishment depends on standards that a

16

defendant cannot possibly know and that may be used to

bootstrap any amount of punitive damages to a compen-

satory award, it overdeters. See, e.g., D. Owen, The

Moral Foundations of Punitive Damages, 40 Ala. J.. Rev.

705, 729-730 (1989) (unpredictable punitive liability di-

minishes social utility by deterring useful social conduct);

D. Ellis, Punitive Damages, Due Process, and the Jury,

40 Ala. L. Rev. 975, 988 (1989) (“[U]ncertainty as to

potential liability induces overinvestment in liability avoid-

ance, Or worse, suppresses innovation, and results in

higher insurance costs for all that are insured”) (footnotes

omitted ).

C. Measurable, Objective Standards Exist For Deter-

mining Whether A Punitive Award Reasonably Re-

lates To The Goals Of Punishment And Deterrence.

This case, like Gore, amply reveals the serious prob-

lems that exist for courts attempting to ensure due process

in the exaction of large punitive damages awards. Un-

fortunately, because the Haslip opinion offered little guid-

ance as to criteria for measuring unconstitutional exces-

siveness, cases like Crocker and Gore are not freakish but

common.’ This Court should intervene and articulate

non-exclusive, but objective and measurable, criteria for

lower courts to consider in determining whether particu-

lar punitive awards are so excessive as to violate the Due

Process Clause. Such criteria should include (i) propor-

tionality to the quantifiable harm that the individual plain-

tiff actually suffered or potentially may have suffered, (ii)

comparison with legislative penalties for similar miscon-

duct, (iii) the extent to which the defendant profited from

the misconduct toward the particular plaintiff, and (iv) in

* Although the Court approved Alabama’s system of post-verdict

review in Haslip, these cases amply demonstrate that Alabama’s

system of review is being misapplied in disregard of defendants’

due process rights. Thus, an elucidation of criteria by this Court

is necessary to keep such appellate review from becoming a hollow,

meaningless process.

17

some cases, the reasonable litigation costs of the plaintiff.

These criteria faithfully serve the goals of punishment and

deterrence and thus may adequately guide a due process

analysis of punitive awards.

Even a cursory examination of these criteria, applied to

the facts in this case, reveals that the $2 million punitive

damages award against Union Security is constitutionally

excessive and warrants this Court’s intervention:

1. Actual and Potential Harm. The best basis for de-

termining unconstitutional excessiveness is comparing the

punitive award to the sum of the quantifiable actual harm

suffered by the plaintiff, and the quantifiable potential

harm likely to occur to the plaintiff, from the defendant’s

conduct.* See TXO Prod. Corp., 113 S. Ct. at 2721-

22 (1993) (plurality opinion) (appropriate to consider

actual and potential harm to plaintiff in reviewing puni-

tive damages award). Even taking a liberal view of the

damages the respondent suffered, or may have potentially

suffered,’ the $2 million award is clearly excessive.

At the outer limits, the respondent’s actual harm could

not have exceeded the amount of the balance of the loan

($14,563) that Union Security declined to pay. Even con-

sidering that the respondent had the “potential” harm of

having her collateral—her residence—foreclosed upon by

First Alabama, her total actual and potential harm would

unlikely be more than double the loan amount or

§ Potential quantifiable harm is also a good measure of the repre-

hensibility of the defendant’s act—a common law standard for

punitive damages—that avoids the danger of arbitrariness in ap-

plying a vague concept like “reprehensibility.”

*In taking this view, ACLI does not suggest the petitioner’s

well-reasoned arguments that the plaintiff suffered a much lower

amount of actual damages, Pet. 17-18, are not ultimately correct.

The amicus brief demonstrates that, even assuming arguendo an

extremely liberal standard of actual and potential harm, the puni-

tive damages remain unconstitutionally disproportionate.

18

$29,126." This places the respondent’s $2 million puni-

tive damages award against Union Security at a level

over 68 times greater than her quantified actual and po-

tential harm. As ACLI argued in its amicus brief in Gore,

a punitive award that is disproportionate to actual and

potential harm should be presumptively unconstitutional,

unless the application of the remaining criteria rebuts that

presumption—a presumption that the amicus contends

applies here as well.

Even absent such a multi-criterion approach, this

Court’s precedent clearly supports the conclusion that the

$2 million award here is excessive. Under the similar

facts of Pacific Mut. Ins. Co. v. Haslip, which concerned

an insurer’s vicarious punitive liability for its non-em-

ployee agent’s wrongful conduct in disregard of the in-

surer’s policies, this Court ruled that a ratio of four-to-one

between punitive and actual damages was “close to the

line.” Haslip, 499 U.S. at 23. ACLI submits that this

case, with a ratio of over 68-to-one even after making

favorable allowances for potential harm, has crossed that

constitutional line.

2. Comparative Penalties. Courts should also com-

pare the punitive award to the legislative and regulatory

penalties for the conduct at issue. Here, the Alabama leg-

islature and regulatory bodies have chosen to permit insur-

ers to contest claims made within one year of the policy’s

signing. See Ala. Ins. Reg. No. 28, § VI(J)(2). Where

the appropriate governmental bodies in Alabama have

chosen not to punish conduct, implicitly setting the pen-

alty for such conduct at zero, it cannot be more consti-

‘© Had respondent been required to vacate her mobile home, her

moving costs and rental costs for an equivalent residence during

the trial would not likely have exceeded the amount of the loan

balance. Moreover, given the alacrity with which her lawyers

responded to service her debt, Pet. 18 n.15, foreclosure was a

remote possibility at best.

19

tutionally disproportionate to levy a multi-million dollar

punitive award on the basis of that conduct."

3. Profits from Misconduct. In awarding punitive

damages, courts should examine the extent to which a

defendant profited from its conduct toward that individual

plaintiff and remove any profit that was derived from the

defendant’s wrongful conduct pertaining to that individ-

ual plaintiff. As discussed above, see supra, at 11-15,

when calculating this prof't, courts should not indiscrimi-

nately aggregate all of the defendant’s dealings under a

general practice—particulariy where the practice is not

considered “wrongful” in most states. Among other

things, this approach punishes a defendant solely for

maintaining a standardized practice regardless of whether

the practice was wrongful.” According to the evidence

below, the profit attributable to Union Security for this

transaction, a certain portion of the Crockers’ premium,

existed in an amount somewhere between $66.38 and

$830." Since the $2 million award is over 2,400 times

1! While in previous briefs the amicus has suggested, as a con-

stitutional criterion, the comparison of a punitive award to other

punitive awards for similar conduct, see, e.g., ACLI amicus brief

at 21-28, Gore, the continued proliferation of punitive damages

awards unfettered by constitutionally sufficient review increasingly

makes this criterion unreliable in measuring punitive awards for

unconstitutional excessiveness.

12 Moreover, because the conduct that appears to be the true

basis of the Alabama Supreme Court’s opinion is the investigation

and denial of the respondent’s claim, it is even more improper to

consider the net gain of all Union Security's nationwide sales of

credit life as Union Security’s “profit.” [(f “profit” is to be assessed

from this conduct, only profit from policies that were denied should

be considered. On this basis, punitive damagee here exceed 155

times the nationwide profit, and 3,000 times the Alabama profit,

that resulted from selling the one percent of Union Security poli-

cies that involved denied claims. Pet. 19-20.

18 These figures are the low-end estimate (4% of Mr. Crocker’s

premium) and the high-end estimate (50% of the joint premium)

of the profit Union Security gained from the Crockers’ purchase

of credit life insurance. See Pet. 17-18.

20

this amount, the profit-based criterion supports a finding

of constitutional excessiveness.

4. Reasonable Litigation Costs. Comparison of the

punitive award to the reasonable litigation costs of the

plaintiff likewise does nothing to justify the excessive

amount of the award in this case. In some cases, it may

well be appropriate to measure punitive damages in terms

of reducing the cost of otherwise uneconomical litigation

to encourage plaintiffs to bring merit-worthy claims, espe-

cially where the detection of the wrongful conduct is un-

likely. But, even considering the $35,000 that the re-

spondent’s attorneys allegedly spent in litigation, the $2

million punitive damages award is over 57 times that

amount.

CONCLUSION

In sum, the punitive damages award against Union Se-

curity grossly exceeds any amount that could be reason-

ably deemed to serve the goals of punishment and deter-

rence. Taking into account all the relevant factors-—that

the award is greater than 68 times the actual and potential

harm to the respondent, that the petitioner’s conduct was

explicitly permitted, not penalized, by Alabama before this

case, that the award is greater than 2,400 times the peti-

tioner’s profit, and that the award is greater than 57 times

the respondent’s legal costs—the award is unconstitution-

ally excessive.

The petition for a writ of certiorari should either be

held pending the disposition of the Gore case or should

be granted.

Respectfully submitted,

Of Counsel: PaTnicia A. DUNN

PHILLIP E. STANO Counsel of Record

AMERICAN COUNCIL OF HARRY I. JOHNSON, IIT

LIFE INSURANCE JONES, DAY, REAVIS & POGUE

1001 Pennsylvania Ave., N.W. 1450G Street, N.W.

Washington, D.C. 20004 Washington, D.C. 20005

(202) 624-2183 (202) 879-8989

Counsei for the Amicus

December 1995