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May 24, 2016 in 75-1.1 Exemptions by

Treble-Damage Awards as Penalties

Plaintiffs who prove violations of N.C. Gen. Stat. § 75-1.1 are automatically entitled to treble damages under N.C. Gen. Stat. § 75-16. The automatic trebling of damages for 75-1.1 claims often leads to substantial verdicts and settlements. It raises several questions:

  • Why are plaintiffs allowed to automatically recover treble damages?
  • Are treble-damage awards meant to penalize parties who violate section 75-1.1?
  • Alternatively (or in addition), are treble damages meant to remedy the harm that section 75-1.1 violations inflict on plaintiffs?
  • Why do the purposes for imposing treble damages matter?

A recent decision from the U.S. District Court for the Eastern District of North Carolina gives us an occasion to study the purposes for treble-damage awards and the potential due-process issues that arise in this setting.

In Woodson vs. Allstate Insurance Co., Judge Terrence W. Boyle awarded treble damages against an insurer as a penalty for a bad-faith settlement of an insurance claim. The plaintiffs sued after their insurance carrier denied their flood-insurance claim. The plaintiffs’ house was in the path of Hurricane Irene; they claimed that the hurricane severely damaged their home. The insurance company denied the claim. It maintained that all of the damage to the home existed before the hurricane hit.

After a bench trial, Judge Boyle found that the hurricane was the sole cause of the damage to the home. He ruled from the bench that the refusal to pay the claim not only breached the flood insurance contract, but also showed bad faith.

The court credited the testimony of a structural-engineering expert that the homeowners and the insurance company retained jointly. The expert unequivocally found that the hurricane was the sole cause of the claimed damage to the house. The court’s finding of bad faith stemmed mainly from the insurance company’s proffer of an expert report that claimed that all the damages occurred before the hurricane. The jointly appointed expert roundly discredited that report at trial.

In a written decision after the trial, Judge Boyle held that the insurance company’s bad-faith refusal to pay the claim was an unfair trade practice that violated section 75-1.1. As a result of the violation, Judge Boyle trebled the damages connected with the breach of the insurance contract.

Punitive or Remedial?

Judge Boyle held that the insurance company’s conduct violated section 75-1.1. He observed that the federal flood insurance program showed “an avowed federal interest” for providing relief for meritorious flood claims. He wrote that “it is important to send a message that . . . bad faith denials will not be tolerated.”

As this language shows, the court appeared to impose treble damages to penalize the insurer for its bad-faith claims handling. This use of treble damages to penalize the insurer raises an interesting question: Is the purpose of imposing treble damages punitive, remedial, or both?

The North Carolina Supreme Court has written that allowing treble damages for violations of section 75-1.1 has both punitive and remedial purposes. The remedial purposes include (1) encouraging private enforcement of section 75-1.1 and (2) creating incentives for settlement.

One might ask whether these purposes really show that section 75-1.1 is non-punitive. What prompts a plaintiff to sue and prompts a defendant to settle a defensible case, after all, is the degree of probability of a large judgment and the magnitude of the predicted judgment. These factors are the same whether one calls the predicted judgment remedial or punitive.

The Supreme Court’s statement that treble-damage awards are partly remedial might be motivated by concerns over the constitutionality of any other outcome. If section 75-1.1 were considered solely punitive, that outcome would expose section 75-1.1 to the charge that it is too vague to satisfy due process, given the vagueness of the conduct standard under the statute. Courts usually reserve vagueness challenges for punitive statutes.

This brings us back to the court’s treble-damages award in Woodson. Is that award subject to a due-process attack because the court sought to penalize the insurer through treble damages?

Probably not. Although Judge Boyle referred only to punitive reasons for imposing treble damages, his decision is also consistent with the remedial purposes of section 75-1.1, as currently framed in the case law. As noted above, a plaintiff’s incentive to sue, and a defendant’s incentive to settle, are not affected by the labeling of the remedy.

In addition, it would be especially hard for an insurer to mount a vagueness attack against a bad-faith-based 75-1.1 claim. The plaintiff in Woodson alleged a per se violation of 75-1.1, invoking the explicit statute that governs settlements of insurance claims. That statute condemns several specific practices. The forbidden practices include an insurer’s failure to settle claims promptly where liability is reasonably clear. It also condemns compelling an insured to litigate by offering substantially less than the amount that the insured ultimately recovers.

The factors that walled off a vagueness defense in Woodson, of course, wouldn’t be present in all fact patterns that generate 75-1.1 claims. Given the wide variety of section 75-1.1 claims, the large damages that are often involved, and the questionable reasoning that has defeated vagueness challenges so far, we might expect more potent vagueness challenges in the future.

Author: George Sanderson