# Amicus Curiae Brief — Union Security Life Insurance v. Crocker > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_1273%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1996 - **Citation:** 517 U.S. 1230 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_1273%3A4. Public record. Not legal advice.