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What Are Punitive Damages?

26 May

I’m originally from Michigan and I have family there. I was researching Michigan insurance law, and discovered that in Michigan, the award of punitive damages to policyholders who have been treated badly by insurance companies is not common – in fact, Michigan courts discourage it.

The Definition of Punitive Damages

The word “punitive” means “intended as punishment.” Punitive damages are the monies that a court (or jury) awards to a plaintiff (the person who brought the lawsuit) when the court wants to send a message to the defendant that they need to stop their bad behavior. When you hear reports of large court awards, such as in the tens of millions of dollars, that is probably due to the punitive damages.

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Punishment comes in many forms. Here, some old school pain and humiliation. (Credit Wikipedia)

There is a lot of controversy about punitive damages, because when the court punishes a large corporation by imposing a large money judgment, that money goes to the plaintiff for that one case. People don’t know how they feel about  “punishment money” meant to deter future bad behavior being awarded to that one person who filed a lawsuit. There are arguments that this motivates plaintiffs to be greedy and file unsubstantiated or frivolous lawsuits. For more on this debate, see the famous McDonald’s hot coffee case.

Punitives Aren’t Perfect But Right Now, They’re All We’ve Got

You are probably already aware that the current American civil justice system is VERY expensive. If you are injured by a corporation and are looking to be compensated for your injury, the odds are severely stacked against you right from the beginning. Corporations have all the resources they need at their disposal to make sure you give up and just go away. They will offer you a ridiculously small amount of settlement money (or nothing) and force you to either give up or find a lawyer willing to take on your case for an amount you can afford.

This significant power imbalance is supposed to be kept in check by the laws of the United States – a combination of American civil court decisions and the laws written by legislatures. Do you feel like the laws of the U.S. are prioritizing your rights? Do you feel like you are treated with equal respect as the wishes of a large corporate entity? In the current United States climate, the answer is a resounding NO, and unfortunately our citizens have just “gotten used to it.” But it doesn’t need to be that way.

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You vs. Giant Corporation – P.S. That army is also on their side – that’s their legal department (photo credit Wikipedia, “David and Goliath”)

The Creation of Punitive Damages – Why?

Punitive damages were created by the American courts in an attempt to equal that “playing field” between you and a giant, all-powerful corporation. This is done in two ways:

  1. The monetary reward of punitive damages creates motivation for your attorney (called a plaintiff’s or Consumer’s attorney) to take on an incredible, crazy amount of financial risk.
  2. The corporation who acted badly will think twice about their bad actions if they are facing a punishment of tens of millions of dollars.

1)  The Insane Risk of the Plaintiff’s Attorney

In the current climate, if you want to be fully compensated for an injury caused by a corporation, you have to locate a lawyer who is willing to take on your case and then file a lawsuit. This is problematic because the American legal system is incredibly time-consuming and very, very expensive. Why? Mostly because 1) our American courts are severely underfunded and overburdened (and therefore VERY slow – the full lifecycle of a court case from filing to end of appeals, is 7-10 years) and 2) when you are suing a large corporation, it is common strategy for them to drag the process out as long as possible with the hope that it becomes too expensive and burdensome for you, and you will be forced to either give up or settle for pennies on the dollar. Also, if you don’t have a stellar lawyer in your corner, the very clever corporate lawyers will crush you. Feeling intimidated yet?

As a result, unless you are independently wealthy and can pay the hourly rate of a lawyer for years of work (amounting to hundreds of thousands of dollars), you need to find a contingency lawyer who is willing to take your case on and only be paid if they win. There are not that many contingency lawyers with those kind of resources and that level of confidence. They need to be very careful to select only the cases they really believe they can win, and those cases must be worth enough for them to gamble away 7-10 years of their lives. Choose the wrong case and you’ll be bankrupt.

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The Madhouse – Is your plaintiff’s lawyer one step from being admitted? (Credit Wikipedia)

Punitive damages equal the playing field by creating an incentive for you and your lawyer to commit to the case for the long haul – even knowing that the odds are significantly stacked against you. If one thing goes wrong, the entire value of the case can be lost in an instant. And those clever corporate lawyers spend all the time and resources available to find that one thing.

2)  Punishing the Greedy Corporation So They Won’t Do it Again

The other reasoning behind punitive damages – and the primary reason cited by courts, is to punish the bad corporate actor so they are deterred from doing it again. This is why punitive damages can be so large. The Supreme Court allows punitives to be about 10 times the award granted to compensate you for what the bad action actually cost you over the years. So for example, if the bad action cost you $1million in losses over the years, a court can award an additional $10million in punitive damages.

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Probably slightly more effective than a slap on the wrist (Credit Wikipedia)

The problem with these punishment awards is that modern American corporations are so large and profitable that a $10million punishment is easily absorbed into their multi-billion dollar budget. For example, in the famous McDonald’s coffee case, even if the $2.7million in punitive damages had actually been upheld (it wasn’t), this was only meant to represent two days of coffee sales. Why would McDonalds be concerned about a mere two days of coffee sales, considering that coffee is only one item on their extensive menus and there are 365 days in a year? That “punishment” was a very tiny slap on the wrist, and definitely not enough to stop them from doing whatever they please – including hurting more and more people just to make extra profit.

So, Do Punitive Damages Work?

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This judge looks willing to punish evil doers, am I right? (Credit Wikipedia)

While punitive damages are a great idea thought up by clever judges, they are not having the effects they are meant to have. American consumers do not have an equal playing field against giant corporations – not even remotely close. Court created remedies like punitive damages are only helpful after the damage is done. To really help the consumer, American lawmakers need to write stronger laws, and those laws need to be enforced. Right now, there are not enough protective laws, and those that do exist are not being enforced by government agencies. The task of enforcement falls to the occasional brave plaintiff who files a claim and does not give up, and his crazy, risk-taking lawyer who cares enough about justice that they will face bankruptcy and ruin. The result? Consumers continue to be mistreated on a daily basis, and there is almost nothing they can do about it.

As you can see from the picture painted above, while punitive damages create incentive for consumers who have been hurt to find a lawyer able to stand up to giant, wealthy corporations (and creates incentive for that lawyer to do so), the consumer is still statistically bound to fail somewhere along the course of the claim, long before punitive damages can ever be awarded.

The noble creation of punitive damages cannot fully compensate for the lack of strong laws written by our elected senators and representatives, and then the actual enforcement of those laws.

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The Seal of the State of Michigan

The Michigan Idiosyncrasy

Back to Michigan – What prompted this blog post was my discovery that the State of Michigan has a very confusing policy on punitive damages. While technically the Michigan courts will allow punitive damages to be granted, they clarified only “as compensation to the plaintiff, (but) not as punishment of the defendant.” Someone needs to tell Michigan that the very definition of “punitive” is “for punishment.”

See Peisner v. Detroit Free Press Inc., 104 Mich.App. 59, 304 N.W. 2d 814.

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For the punitive damages rules in your state, see “Limits on Punitive Damages” – they provide a table listing every state.

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Insurance Loss Ratios: Licenses to Steal?

30 Apr

If you are not a frequent reader of my blog, you may not know that I’m an Insurance Litigator. My readers will tell you I’m also a very curious Insurance Litigator – always reading and asking questions. I was recently reading about long term care (LTC) insurance and discovered an insurance concept I think everyone should know about (not just insurance industry insiders). The concept is called “loss ratios.”

What is a Loss Ratio?

A loss ratio is the percentage of your premiums your insurance company has full government authorization to keep. If that seems strange to you, it should. Why would the government give insurance companies permission to keep most of your premiums? You buy insurance because you expect to be paid when you suffer a loss. If insurers are allowed to keep a certain amount of your premiums, they most certainly will attempt to keep as much of that amount as possible! What an excellent motivation to wrongfully deny your claim – insurance companies are profit-driven businesses, after all.

Example of a Loss Ratio

NAIC logoFor example, the National Association of Insurance Commissioners (NAIC) has drafted model regulations* that allow insurance companies to keep 40% of the premiums collected for Long Term Care (LTC) policies. It doesn’t matter if the LTC policyholder actually needs more care than 60% of what they paid in premiums – insurers won’t be required by government regulations to pay it. Of course, if you have been denied your insurance benefits and you hire an insurance attorney, you can enforce your legal rights through other channels. But the government isn’t stopping insurance companies from underpaying you at the outset.

How to Calculate a Loss Ratio

My crude, yet ingenious graphic on loss ratios. Please excuse my handwriting and my sarcasm!

My crude, yet ingenious graphic on loss ratios. Please excuse my handwriting, and if you are feeling generous, my sarcasm!

Loss ratios are calculated by a simple equation in which you place the insurance company’s “loss,” or amount paid to policyholders in benefits (don’t you love that when they pay the benefits they owe, they call it “loss”?) above the amount the insurance company has collected in premiums. You divide the “loss” by the “premiums” to get the loss ratio. I’ll include a crude graphic to help you visualize.

I promise to look further into this concept and report what I find.

*NAIC model regulations have historically been adopted by most state insurance codes. See Section 19 for the Loss Ratio clause.

Is Health Insurance a Human Right?

16 May
Children Ponder the UDHR

Children Ponder the Universal Declaration of Human Rights (photo credit: United Nations website)

Many of you may know that besides my law degree, I have a Specialization in International Law. I was fortunate enough to train at one of the top schools for International Law, DePaul University. While I did not follow the path to a career in the field, I am in contact with many who did, and I still find myself questioning our American society with an eye toward international standards. Which brings me to my current pondering – Should health insurance be considered an inherent human right?

The Universal Declaration of Human Rights (adopted 1948)

In the post-World War period, nations were occupied with how to prevent another devastating world war from transpiring. After all, leaders had already done their best in the years after WWI to prevent another mass human slaughter, and look where that got them. Clearly they needed some fresh strategies. At the United Nations, talks were in progress for the drafting of a treaty which would detail the inherent and inalienable rights of a human. If you are born a human, you have these human rights – simple as that. The lead drafter of this document was none other than American politician and First Lady Eleanor Roosevelt.

Our Inalienable Right to Health

Article 25 of the UDHR (emphasis added):

Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.

The UDHR was unanimously adopted by the United Nations in 1948 (48 yays and 8 abstentions). So how is it that sixty-six years later, in 2014, we are JUST NOW readjusting our health system so that those without insurance coverage have a new chance at obtaining it? While it is true that medical care can be accessed without insurance, in the United States it has become largely unaffordable for the uninsured. Quite simply, people die early and easily preventable deaths in our country, because they are un- (or under-) insured. It happened in my own family, as recently as January.

I, for one, find this to be an entirely unacceptable state of affairs. Our country had more sense and human compassion during those post world war days than it does today. Today we are increasingly becoming corporate pawns, unable to think for ourselves and happy to take home our satisfactory paycheck and believe the uplifting stories we are fed by corporate media. If we don’t start looking around us and noticing the suffering of our compatriots, we could end up embroiled in crises we cannot yet comprehend. Perhaps another Revolution? I hope not. Our predecessors drafted documents like the Universal Declaration of Human Rights to prevent those very bloody catastrophes from occurring.

American Flags

American Flags

I am thankful that our government finally addressed the lack of equal access to health care in this country, even if it took them a shameful sixty-six years to make a bold move toward that ideal standard our very own Eleanor Roosevelt helped memorialize. Every nation of the world should periodically pause to recall the massive amount of suffering and death the world experienced in WWs I and II, and strive to reach the principles set out by the UDHR. As Article 1 of the Declaration states:

All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.

Amen to that.

 

 

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