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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.

When Insurance Companies Merge

29 Jul

 

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Giant Insurance Company Logo Collage (courtesy of Hartford Courant)

Depending on who you ask, insurance company mergers will either help or hurt consumers. Whether a merger in general is a good or a bad thing is debatable. The problem today is that there have already been so many mergers of insurance companies that we are heading directly toward an oligopoly or monopoly, which is a well-established BAD thing for consumers. Healthy competition is a building block to a free market economy.

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Competition is a Spectator Sport (photo courtesy of Wikipedia)

As a general rule in the insurance world, any time the federal government is actually motivated to step in and do something, it’s probably because an issue of vital and imminent importance has entered their radar screen. And so, the Justice Department has stepped in to investigate the proposed mergers between Humana and Aetna, and Cigna and Anthem.

The Hartford Courant (based in the U.S. headquarters of the insurance industry, Hartford, CT) has written a very nice article about how different sectors of the population will be affected in the event of the proposed merger of these giant insurance companies – seniors, low income families, employers, and physicians and health care providers.

Why is U.S. Insurance Regulated by the States? Why Should You Care?

9 Jun
The Gilded Dome of a Historical Insurance Company in Washington, D.C.

The Gilded Dome of a Historical Insurance Company in Washington, D.C.

The United States has always had a state-based insurance regulatory system. This means that every insurance company wishing to sell insurance in the U.S. must satisfy the different rules of EACH and EVERY state in which it would like to sell policies. As you can imagine, this causes a lot of extra expense and headaches, both for state governments and the insurers. Following more than 50 different regulatory schemes (don’t forget the territories) seems increasingly more ridiculous as the rest of the economic world gets smaller due to cheaper travel, deregulation of industries, and large migrating populations.

What is particularly shocking about state-based regulation is how much it costs in comparison to the systems in other countries – A U.S.-based insurer spends 6.8 TIMES MORE (per premium dollar) on operations than a U.K.-based insurer. U.S. life insurers pay an extra $5.7 billion annually, and U.S. property and casualty (P/C) insurers spend an extra $7.2 billion. I don’t need to tell you this adds up to a LOT of money, even after you average it across the industry.

Why Hasn’t Regulation Been Streamlined? Because that Would Cut into Profits.

With our state-based system causing such exorbitant excess costs, why don’t we see insurance companies pushing to have all regulation shifted to one uniform body, such as the federal government? Inexplicably, despite paying 6.8 times more for operations than their U.K. counterparts, American insurers still assert that the state-by-state regulation is better. They cite long lists of reasons, from the vague “we’ve always done it this way and it works” (works for WHOM?) to “insurance is local in nature and does not lend itself to uniform national regulation,” to “states are better positioned to respond to consumer complaints” (haven’t seen that, myself, and California is notoriously consumer-friendly). They even claim that states already have “mechanisms to achieve uniformity” (despite that they absolutely DON’T achieve any noticeable uniformity – and I know, I’ve researched each state) and that a “state-based system provides better opportunities for experimentation with ideas” (again, for WHOM? and to whose benefit?).

Enough Profits to Build Monuments in Gold?

Enough Profits to Build Monuments in Gold?

Their laundry list of grasping ideas leads me to believe the REAL motivation is simple – insurers believe they make more money under state regulation. Insurance companies are profit-motivated corporations like every other, so the bottom line is always profitability. This tells me that despite having costs 6.8 times higher than in the U.K., American insurance companies are recouping that money and MORE because state regulations are weak, lack uniformity, and are hardly enforced. In other words, insurers make so much money off of unprotected consumers that they prefer the state system.

The Federal Insurance Office:  A Step Toward Uniformity

Enter the FIO. After the financial crisis in 2008, when AIG demonstrated that insurers are not only VERY global in reach but also have the ability to bring down our entire economy (see the arguments about insurers and “systemic importance”), Congress passed the Dodd-Frank Act to reform Wall Street and increase consumer protections. In 2010, Dodd-Frank established the first federal regulatory body with the power to regulate the insurance industry – the Federal Insurance office. Given that insurers hold half of all U.S. bank held-assetsthe complete lack of federal oversight over insurance companies until 2010 was more than a little frightening. Even the most adamant free market capitalist will begrudgingly admit that some uniform and effective regulation is necessary to keep the markets healthy.

Goodbye, Bad Behavior?

In case you haven’t been on the receiving end of an insurance company’s unfair claims handling procedures yet, let me point out an interesting and little-known fact. Insurance is the only industry which has given rise to a legal specialization dedicated solely to fighting the extreme bad behaviors of JUST THAT industry. Insurance company behavior has been so bad, for such a long time, that an entire field of law emerged in response: insurance bad faith. I truly hope that the FIO will be able to put a stop to most of the bad faith of insurers, for the benefit of us all.

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