Punitive Damage Awards in Financial Injury Jury Verdicts

Personal injury disputes—for example, those concerning asbestos or medical devices—have dominated the long-running debate over tort reform and punitive damages. However, prior ICJ studies established that almost half of all punitive damage awards were made in cases in which the damages were financial in nature, rather than personal. Moreover, these financial injury verdicts are far more likely to include an award of punitive damages. While punitive damages are awarded in less than 4 percent of all civil jury verdicts, there is a 1-in-7 chance of a punitive award in disputes arising from contractual or commercial relationships, including, for example, disputes stemming from insurance or employment contracts or from unfair business practices.

Little detailed information has been available about financial injury cases. To provide an empirical basis for the ongoing debate about punitive damages, Erik Moller, Nicholas Pace, and Stephen Carroll drew on the ICJ's jury verdict database to conduct the first close analysis of trends and patterns in punitive awards for financial injuries. The study comes as Congress is considering limiting punitive awards—many states already have caps in place, and other states are weighing them—and includes estimates of the effects of capping punitive damage awards at some multiple of compensatory damages.

The study is based on data collected during the period 1985–1994 in all state trial courts of general jurisdiction in California; New York State; Cook County, Illinois (Chicago); the St. Louis, Missouri, metropolitan area; and Harris County, Texas (Houston); and during the period 1992–1997 in Alabama. The jurisdictions represent a diverse sample of legal standards, attitudes and behavior, geographic locations, and demographics, and collectively account for about a quarter of the U.S. population.

Among the study's key findings (in 1992 dollars throughout):

• Excluding Alabama, punitive damages were awarded in about 14 percent of all financial injury verdicts in these jurisdictions. The average (mean) award ranged from $2.1 million in real property cases to $7.9 million in insurance cases.
• In Alabama, punitive damages were awarded in 17 to 32 percent of financial injury verdicts, with an average award of $540,000 to $945,000.
• Punitive damages were awarded most often in Alabama, California, and Harris County; average awards were considerably higher in California, Cook County, and Harris County.
• Excluding Alabama, the total number of punitive awards in financial injury cases across all the jurisdictions decreased between the periods 1985–1989 and 1990–1994, both absolutely and as a percentage of the overall number of financial injury jury verdicts. However, the average award amount and punitive damages as a percentage of all damages increased.
• In all jurisdictions, caps on punitive damage awards would have had substantial effects on the cases studied.

Punitive Damage Awards in Study Jurisdictions Excluding Alabama: 1985 Through 1994

Perspectives differ about which features of punitive damage awards are most important. Accordingly, the authors report multiple measures of punitive damage awards. The fraction of cases in which punitive damages are awarded indicates the probability that punitive damages will be awarded in a case. The proportion of total awards that is punitive damages indicates the fraction of all the moneys awarded that is punitive. The mean award is, in a statistical sense, the amount a defendant could expect to pay if a jury made a punitive award. The median award indicates the typical amount of punitive damages awarded, in the sense that if all punitive awards are ranked by amount, the median award is the one at the center. The 90th percentile award captures the worst-case scenario—only 10 percent of awards are larger. The amount of punitive damages awarded in a case divided by the amount of compensatory damages awarded in that case indicates how the punitive award compares to the harm suffered by the plaintiff, as measured by the amount required to compensate the plaintiff for his or her financial injury.

Variation by Case Type

The authors categorized the financial injury cases in the database to reflect case types frequently mentioned in the policy debate, including insurance, employment, securities, real property, other contract, and other commercial. Table 1 summarizes the punitive damages awarded in each case type in the jurisdictions studied.

Excluding securities and other commercial cases, for which there were few observations, punitive damages were awarded in about 14 percent of all financial injury cases. Punitive awards were often high—the mean varying from $2.1 million to $7.9 million, with an overall mean of $5.3 million. The overall 90th percentile award was $6.2 million.

Punitive damages represented a large portion of the total amount of damages awarded in these case types. As Figure 1 shows, punitive damages represented more than half of all the damages awarded overall, including those cases in which there was no punitive award, and more than 60 percent in insurance and securities cases.

Overall, the median ratio of punitive damages to compensatory damages was 1.4; that is, punitive awards were typically about 40 percent larger than the compensatory award (Figure 2). The highest median ratio was in insurance verdicts, in which punitive awards were typically almost four times higher than compensatory awards. The median ratio of punitive damages to compensatory damages was just under 3 for other commercial cases and ranged between 0.9 and 1.5 in the other case types.

Variation by Jurisdiction

Among the jurisdictions studied, punitive damage awards were most common in California and in Harris County, Texas, where they were awarded in about 20 and 14 percent of all financial injury verdicts, respectively.

Award amounts varied across jurisdictions. The mean punitive damage award was considerably higher in California ($5.8 million), Cook County ($3.2 million), and Harris County ($6.7 million) than in New York ($570,000) or the St. Louis metropolitan area ($360,000). And in the former three jurisdictions, punitive damages represented more than half of total damages awarded.

The ratio of punitive award to compensatory award also varied across jurisdictions. This ratio was much larger in Cook County (2.5) and the St. Louis metropolitan area (2.3) than in California (1.5), Harris County (1.0), or New York (0.5).

Variation over Time

The authors analyzed the entire population of financial injury verdicts in the database for the 5-year periods 1985–1989 and 1990–1994. The number of punitive awards decreased between these periods, both in absolute numbers and as a percentage of the overall number of verdicts. Punitive damages were awarded in about 16 percent of all financial injury verdicts in the 1985–1989 period and in about 13 percent of all financial injury verdicts in the 1990–1994 period. This change reflects the facts that plaintiffs were winning at a slightly lower rate, and, given that they had won the case, were being awarded punitive damages slightly less frequently. (The study did not consider the question of whether these declines reflect changes in jury behavior or changes in plaintiffs' and defendants' litigation strategies, which, in turn, changed the mix of cases going to verdict.)

However, the mean award amount increased from $3.4 million to $7.6 million between these two periods. In addition, punitive damages represented a larger portion of all damages awarded, rising from about 44 percent of all damages awarded in the 1985–1989 period to slightly less than 60 percent in the later period.

In contrast, the median ratio of punitive damages to compensatory damages fell over the two periods, from 1.5 to 1.2. Given that the size of punitive awards, on average, grew from the late 1980s to the early 1990s, the decline in this ratio suggests that compensatory awards were climbing even faster.

Estimated Effect of Caps on Punitive Damage Awards

Many states have already approved caps on punitive damage awards, and similar measures are being considered in other states and at the federal level. To provide some context for the policy debate, the authors estimated what the effects would have been of imposing caps on the existing financial injury punitive awards in the database (Table 2). The caps analyzed are different multiples of the compensatory damages awarded in the case and span legislative efforts in many states.

If punitive damages had been capped at the amount of compensatory damages in each case, 60 percent of all punitive awards would have been affected, and the total amount of punitive damages awarded in these cases would have been reduced by roughly 65 percent. If caps had been imposed at higher levels, fewer awards and a smaller percentage of the damages awarded would have been affected. For example, a cap of three times compensatory damages would have affected about one-third of all the financial injury punitive awards and decreased the total amount of punitive damages awarded by 40 percent.

The authors caution that, were such caps to be imposed, the future experience in these jurisdictions would not necessarily mirror these estimates. Legislation imposing caps would also affect claiming and settlement behavior. In addition, if juries were aware of caps, they might take limits on punitive damages into their calculations of compensatory damages.

Punitive Damage Awards in Alabama: 1992 to 1997

The authors analyzed data describing verdicts reached in Alabama's trial courts of general jurisdiction from 1992 to 1997. They estimated that the percentage of all financial injury verdicts in which punitive damages were awarded in Alabama was between 17 and 32 percent during that period.^[1] The mean punitive damage award was between $540,000 and $945,000; the 90th percentile award was between $947,000 and $1.9 million. In Alabama, punitive damages represented between 80 and 86 percent of all damages awarded in all financial injury verdicts.

The median ratio of punitive damages to compensatory damages in Alabama was somewhat over 5; this compares with 0.5–2.5 in the other jurisdictions studied. These data suggest that, in Alabama, punitive damages are awarded more often and are higher in any given case relative to compensatory damages than in the other jurisdictions in the database.

The analysts also estimated the effects of a range of caps on punitive damage awards in the Alabama data. They estimated that a cap at the level of compensatory damages would have affected approximately 80 percent of the punitive awards in financial injury cases in Alabama and would have reduced the total amount of punitive damages awarded in these cases by about 90 percent. A cap at three times compensatory damages would have affected 60 percent of the punitive damage awards and reduced the total amount of punitive damages awarded by 82 percent. A cap at five times compensatory damages would have affected half of the punitive damage awards in financial injury cases in the state and reduced the total amount of punitive damages awarded in these cases by 77 percent.

These estimates assumed that all general awards were compensatory. Had the researchers assumed that the awards were in part or entirely punitive in nature, the effect of caps would have been larger.

Notes

• [1] The results for Alabama are presented as a range, because some "general awards" are reported as a lump sum, without distinguishing what portion, if any, is a punitive award. The lower number in the estimated 17-to-32-percent range assumes that the awards are entirely compensatory; the upper number assumes that they are entirely punitive.