Punitive Damages With A Factor Of Five Are "Legally Possible" When Computing Amount In Controversy
KEELING v. ESURANCE INSURANCE COMPANY (September 26, 2011)
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Esurance Insurance Company has issued over 50,000 automobile insurance policies with uninsured/underinsured motorist coverage. It has collected more than $600,000 in premiums and paid no claims. A class of policyholders brought suit for fraud against Esurance, alleging that the uninsured/underinsured coverage was worthless given the policy language. Esurance removed the action to federal court pursuant to the Class Action Fairness Act. Chief Judge Herndon (S.D. Ill.) concluded that the amount in controversy included the $600,000 in premiums, what little amount it would cost to amend the policy form as requested by the class, and punitive damages. Concluding that a $4.4 million punitive damage award was "legally impossible," he remanded the class action to state court on the ground that it did not meet the $5 million amount in controversy threshold. Plaintiffs appeal.
In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Cudahy and Kanne reversed and remanded. The Court noted that the district court stated the correct "legally impossible" standard but applied it improperly. First, the value of the injunctive relief is not simply the cost of changing a form. Esurance currently reports a $125,000 annual profit on the challenged coverage. Eliminating the coverage (and the profit) would cost Esurance $1.5 million (the present value of $125,000 for 20 years). Therefore, the question becomes whether it is "legally impossible" for the plaintiffs to be awarded $3 million in punitive damages. A $3 million punitive damage award, compared to the $600,000 in actual class injury, would only be a multiplier of five. Illinois courts have affirmed punitive damage awards with higher multipliers. The Supreme Court has suggested that such a multiplier would not be unconstitutional. Although such an award might be improbable, the Court concluded that it was not "legally impossible" and that the amount in controversy requirement was met.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select