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Avoiding Liability for Punitive Damages

If litigation is a poker game, then punitive damages are its wild card.

All business owners should be aware of some basic principles concerning the law of punitive damages. An award of punitive damages in a single case can destroy an otherwise healthy business. Employers can be vicariously liable for punitive awards based on the misconduct of employees, even where such behavior is unauthorized by management. Punitive damages are awarded based on the "enlightened conscience of the jury," and enormous awards may be legally sustainable even where actual damages are comparatively small. Unlike cases without punitive damage claims, the assets and earnings of a defendant may be admissible in evidence when punitive damages are sought, so that the jury, if it decides to award punitive damages, can calculate a sum which "hurts" the defendant. For large corporations, this type of disclosure and attendant risk can be a particularly unsettling experience. Insurance coverage for punitive damages is frequently excluded by carriers in Georgia and those states which allow such coverage, whereas other states prohibit insurers from providing such coverage altogether. Given this exposure, how can a business protect itself?

The answer lies in recognizing the circumstances where the law allows the recovery of punitive damages. Generally speaking, punitive damages are authorized to punish and deter intentional misconduct. Consequently, employers should implement policies and procedures designed to prevent deception and intentional misconduct. Likewise, employers should thoroughly investigate claims that intentional wrongdoing has occurred and respond accordingly.

The Georgia Code was amended in 1987 to narrow the circumstances when punitive damages are authorized:

  • Punitive damages may be awarded only in such tort actions in which it is proven by clear and convincing evidence that the defendant's actions showed willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.

    The Georgia Code also provides a cap on such damages of $250,000, except in products liability cases and those cases where the defendant acted, or failed to act, with a specific intent to cause harm.

    Businesses involved in litigation often encounter punitive damage exposure in conjunction with fraud claims. Fraud is legally defined as an intentional misrepresentation, known to be false, made to induce action or forbearance, on which the claimant justifiably relies and sustains damages as a proximate result. In plain language, this essentially means lying and cheating. But Georgia law also recognizes the principle that fraud is subtle, and that slight circumstances may demonstrate its existence. As a practical matter, this means that trial judges may be reluctant to dismiss even tenuous fraud claims prior to trial. Nonetheless, those defending fraud claims should avail themselves of every opportunity to prevent such claims from being decided by a jury.

    Appellate relief from punitive awards may be difficult to obtain in the event of a bad result at trial. A recent decision by the U.S. Supreme Court had identified certain "guideposts" to determine when punitive damages are so "grossly excessive" as to violate the due process clause of the fourteenth amendment. In BMW of North America Inc. v. Gore 116 S. Ct. 1589 (1996), an Alabama jury awarded a BMW purchaser $4,000 in actual damages and $4,000,000 in punitive damages for paint defects. The Alabama Supreme Court reduced the punitive award to $2,000,000. The U.S. Supreme Court reversed the $2,000,000 award and remanded the case based on its evaluation of three criteria: (1) the degree of reprehensibility of the defendant's conduct; (2) the ratio between compensatory and punitive damages, and; (3) the difference between the punitive award and civil or criminal sanctions for comparable misconduct. The Court stated that punitive damages of 500 times actual damages were clearly too high. However, the Court declined to specify a maximum ratio which would be allowable. This means that state courts will continue to retain a great deal of discretion in evaluating punitive damage awards.

    In sum, business owners need to recognize the risk posed by potential punitive damage claims and plan accordingly. Ethical business practices and procedures, coupled with risk management training, can be effective means to ward off punitive claims altogether. Insurance should be considered to hedge against catastrophic loss. If punitive claims do occur, competent counsel should be consulted immediately.

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