N.C. Supreme Court Backs Punitive Damages Cap

The North Carolina Supreme Court has reaffirmed the constitutionality of the state’s law capping punitive damages, a decision that maintains the certainty and predictability of North Carolina’s judicial system, according to the American Insurance Association (AIA). AIA joined with the North Carolina Citizens for Business and Industry (NCCBI) in an amicus brief supporting the law limiting punitive damages.

The plaintiffs challenged the cap’s constitutionality after judges at both the Superior Court and Court of Appeals levels held that a jury’s $23 million punitive damages award was inconsistent with state law, which limits any punitive damage award to $250,000 or three times the compensatory damages, whichever is greater.

The case of Rhyne v. K-Mart began in state Superior Court, with a guilty verdict against K-Mart for their security guards’ treatment of a Rhyne couple found on K-Mart property after hours. A jury awarded compensatory damages of approximately $19,000 to the Rhynes, along with $22.5 million in punitive damages. The Superior Court judge reduced the punitive award to $250,000 for each plaintiff.

Both parties appealed, the plaintiffs arguing the punitive damages cap was unconstitutional, and K-Mart questioning whether, among other issues, the law applied to each plaintiff or each cause of action. The Court of Appeals upheld the punitive damages cap as constitutional, and ruled that the law applied to each plaintiff. The Supreme Court affirmed that decision.

“The concept of punitive damages, like much of tort law, has been expanded far beyond the original intent—to punish real bad actors,” said David Snyder, AIA vice president and assistant general counsel. “But the financial effects of punitive damages extend far beyond their direct assessment. In reality, the greatest harm they inflict is the leverage they create to force defendants and insurers to settle cases with high amounts that should be contested or should be settled at much lower amounts. In addition, the state Supreme Court cited U.S. Supreme Court cases which have restricted punitive damages so that they are appropriately limited in amount and based upon truly extraordinary facts.”

Snyder said the North Carolina law is important to policyholders and insurers for several reasons. “First, it imposes a limit, or cap, so that in cases where justified, the upper amount of punitive damages is knowable by the policyholder and capable of being financially planned for. More importantly, however, the cap makes insurance more predictable because both insurers and policyholders now know the maximum downside that could occur. This will enable them to contest unmeritorious cases or to settle at amounts closer to the real damages.

“The North Carolina Court’s decision is very important in a macro economic and financial sense because it adds a degree of certainty and predictability to litigation in the state. That, in turn, leads to lower insurance rates because insurers do not need to price for unpredictability and a more stable insurance market,” he added.