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California associations, businesses oppose punitive damages bill

The American Insurance Association (AIA), Civil Justice Association of California (CJAC), California Chamber of Commerce (CCC) and Association of California Insurance Companies (ACIC) have joined forces to oppose Senate Bill 832, which would mandate 75 percent of punitive damages awards be directed to the State of California.

The bill, authored by Senator Don Perata, D-East Bay, was waiting Gov. Arnold Schwarzenegger’s signature at press time.

According to the Civil Justice Association of California, existing law provides that in an action for the breach of an obligation not arising from contract, where there is proven evidence that the defendant has been guilty of oppression, fraud or malice, the plaintiff, in addition to the actual damages, may recover damages to set an example and punish the defendant. SB 832 would apportion punitive damages to actions filed after Aug. 16, 2004, that result from a final judgment or settlement that is rendered on or before June 30, 2011, and includes punitive damages. According to the formula, 25 percent of punitive damages would be paid to the plaintiff, and 75 percent of the award would be paid to the director of the Department of Finance for deposit into the Public Benefit Trust Fund. Of the amounts deposited into the fund, 25 percent would be continuously appropriated to pay the plaintiff’s attorney, and the remainder would be available for annual appropriation in the Budget Act, to be used for purposes consistent with the nature of the award.

Sen. Perata’s Press Secretary, Alicia Trost said, “The purpose of punitive damage awards is to punish a wrongdoer and discourage future unfair and illegal behavior. And since plaintiffs are already compensated, it’s appropriate to use punitive damages for public benefit. This bill just extends the sunset of an existing statute that is a couple years’ old and hasn’t had enough time to work. That is why we did the bill.”

The legislation says the jury cannot be advised that the state will get a large amount of the award money, although opposing groups fear that information would be widely known by the public and seen as an opportunity to fund the state.

“I think the business community generally has a problem with this concept because we are afraid the word will get out,” said Jeffery Fuller, executive vice president and general counsel for ACIC. “If you have a jury of 12 people, one of them is going to know that most of the punitive damages awards will go to the state of California. It will essentially become a funding source for state government, and it was never intended for that purpose.”

ACIC and the other opposition groups believe the bill would increase the frequency and severity of punitive damages awards, thereby creating a negative business environment in California.

In a letter to Governor Schwarzenegger requesting a veto on the bill, CJAC President John H. Sullivan stated, “SB 832 is almost certain to increase the size and frequency of punitive damage claims and will worsen California’s already deplorable reputation for fairness in the area of punitive damages.”

He based CJAC’s opposition on four key defects:

1) The bill was a last minute “gut-and-amend” that did not receive the benefit of full procedural input and vetting in the legislature;

2) The bill is retroactive and applies to pending cases;

3) The bill creates conflicts of interest with the plaintiffs’ bar and their clients by unjustifiably and unnecessarily enriching lawyers, and puts the state in an inappropriate position; and

4) The bill is likely to increase the size and frequency of punitive damage claims, which will harm California’s economy.

Nicole Mahrt, public affairs director for the western region of the American Insurance Association, said, “All [SB 832] is going to do is get the plaintiff attorney a percentage of a bigger pot of money and increase costs for businesses.”

ACIC’s letter to the Assembly stated the bill’s concept makes no public policy sense from a fiscal or legal perspective.

It claimed, “As fiscal policy, the bill would burden certain defendants in civil actions with a new obligation to fund the operations of state government. As a revenue source, punitive damage awards would be both unpredictable and unreliable, thereby rendering rational fiscal planning illusory. The bill’s limitation on use of the punitive damage awards is meaningless. The restriction is so broad that practically any governmental function could be funded from this source. From a legal perspective, the bill would encourage exorbitant punitive damage awards.”

According to ACIC, in a typical lawsuit, a punitive damage award of $100,000 would be split as follows: State receives $56,250; plaintiff’s lawyer receives $27,000; and injured party receives $16,750.

Topics California