Punitive Damages (Part 2): Talking Points.

1. Punitive means to punish, to make an example, to change behavior by coercive means.
2. The tool is money. The goal to make it more expensive for insurance companies and multinational corporations to ignore the law than to obey it.
3. For example, Massachusetts has a Consumer Protection law that makes it unlawful for an insurance company to unreasonably delay a settlement of a case when liability becomes reasonably clear. Its purpose is to discourage insurers from acting in bad faith when negotiating a settlement of a personal injury case  before the start of a lawsuit.
4. If a judge or jury, depending on the circumstances, finds an insurance company failed to make a reasonable offer of settlement when liability was reasonably clear then any judgment awarded by a jury can be multiplied 2x or 3x by the trial judge.
5. This multiplication of damages is used as a punishment for the bad faith  and unreasonable delay of the insurance company, and for its failure to make a reasonable offer of settlement prior to the start of a lawsuit.
6. Insurance companies are trying to change the rules in the Consumer Protection statutes. They want to reduce the monetary sanctions to such a degree that the monetary threat becomes meaningless.
7. Money is the only sanction that gets the attention of an insurance company.The monetary sanctions for bad behavior must be substantial to change the behavior of billion dollar insurance companies.
8. A case awaiting decision in the Massachusetts Supreme Court is Rhodes, et al v. AIG Domestic claims, Inc., et al. ( oral argument was heard by the court on October 6, 2011.) Insurance companies are seeking to eliminate “effective sanctions” that a judge, in his/her discretion, can impose. They advocate the elimination of punitive awards that are 2x or 3x the jury verdict.
9. insurance companies want the court to substitute a sanction that would be meaningless and inconsequential as a deterrent.
10. Insurance companies want to limit the sanctions to “the loss of use” of the money that a jury would award. This term is confusing and misleading. It sounds important but it is not an “effective” sanction. Its punishment is similar to fining a millionaire $10 for speeding. It is hardly a deterrent to a person with that economic clout and financial independence.
11. The proposed new sanction would work as follows: assume a jury awarded as damages $250,000. The lawsuit took 3 years to complete. How much interest would be earned, at market rates, on the $250,000 over 3 years? For example, $250,000 x 3% interest=$7500 x 3 years=$22,500.
12. Under the present sanction procedures a judge could multiply the $250,000 by 2x or 3x=a punitive damage award of $500,000 or $750,000. Which sanction do you think would change the behavior of a multinational corporation?
13. The business plan of an insurance company is to earn money (profit) on the investment of premiums and the money its holds in reserve to pay claims in the future. The business model is as follows: the longer the insurer holds the money set aside to pay claims the more it can earn on the return of its investments in stocks and bonds.
14. The financial expertise of an insurance company is not in its claims’ department; it is just a necessary evil to collect premiums for investment. The investing experts are in the finance and underwriting departments of the company.
15. Without the present monetary sanctions in the Consumer Protection law there  is no incentive for an insurance company to pay claims promptly and fairly. The incentive is to pay as little as possible for as long as possible. No adjuster gets promoted for reasonably and promptly paying claims with money that could otherwise be used for investment purposes.
16. The money “held in reserve” to pay future outstanding claims is held in a special reserve account of the company. These funds can be invested while the claims are pending, sometimes for many years.
17. This money “held in reserve” is called “float”. Even though it is held in reserve to pay future claims, in the interim, it is “free” investment money that an insurance company can use to earn profits by investing in stocks and bonds.
18. If one understands the investment plan of an insurance company then one can understand why most adjusters say “no” to fair settlements and why they try to “low ball” their settlement offers prior to a case actually being called for trial.
19. Insurance companies have convinced trial judges and the general public that punitive damages are “unfair” and too draconian  a remedy to correct their occasional and unintentional bad faith behavior. If trial judges truly understood the business plan of insurers for settling cases they would finally realize that their behavior is premeditated. An insurer’s response to a plaintiff’s claim is to keep its money for as long as possible regardless of the merits of any individual claim.
20. The business plans of insurance companies is based upon contravening the good faith and fair dealing requirements of Consumer Protection laws in each state.
21. “Effective” deterrence is money that will compel a change in behavior. Those sanctions only exist if an independent trial judge is permitted to use his discretion to award multiple damages in personal injury cases.

by: Arthur F. Licata, www.alicata.com; arthur@alicata.com

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Tags: Consumer Protection Laws, Puniitve Damages; Insurance; Bad Faith and Unfair Settlement Practices ;monetary sanctions, punitive damages