When Can You Get Punitive Damages From an Insurance Company? Lucarell v. Nationwide

Published January 25, 2018 · Ohio Supreme Court

A Mahoning County jury listened to an insurance agent describe how Nationwide recruited her, financed her agency, and then, she said, set her up to fail. The jury answered with a verdict of more than $42 million, including $36 million in punitive damages. Earlier this month the Supreme Court of Ohio took it apart, and the reason it gave matters to every injured person who has ever wondered whether an insurance company can be punished for the way it handled a claim.

In December we wrote about when you can sue your own insurer for bad faith. Lucarell v. Nationwide Mut. Ins. Co., 152 Ohio St.3d 453, 2018-Ohio-15, is the other half of that conversation: it draws the line between a broken contract, for which Ohio allows no punishment, and a tort, for which it does.

What happened in Lucarell

Christine Lucarell joined Nationwide's Agency Executive Program in 2005. The program recruited new agents with a business plan, training, and a startup loan, on the theory that an agent who reached certain sales goals over three years would become a career agent and have the loan forgiven. Lucarell borrowed $290,000, opened an agency in 2006, and initially won awards. Then cash flow dried up.

Over the next two years Nationwide modified the program, gave her cash infusions, and had her sign two documents containing releases, including one in which she gave up "any and all claims" against the company and represented that she was acting under no economic duress. Her production fell below the required minimum, Nationwide put her on probation, and she resigned in July 2009.

She sued for breach of contract, fraud, invasion of privacy, retaliation, and constructive discharge. The jury found for her on everything that reached it. The trial court cut the award under Ohio's statutory caps and entered judgment for more than $14 million, including $10.5 million in punitive damages. The Seventh District affirmed most of that and even revived the fraud claim.

The holding: no punitive damages for breach of contract, ever

The Supreme Court reversed. Its central holding is one it says it first announced in 1922: "Punitive damages are not recoverable in an action for breach of contract." No matter how willful the breach, and no matter how badly the other side behaved, a contract claim can only recover the money the contract would have delivered.

The Court went further and closed a door some appellate courts had opened. Several districts had suggested that punitive damages could be awarded on a contract claim if the breach was accompanied by a "connected but independent tort." The Supreme Court said it has never recognized that exception. If the same conduct is both a breach of contract and a tort, punitive damages may be awarded only for the tort, and only where the plaintiff "suffered a harm distinct from the breach of contract action and attributable solely to the alleged tortious conduct."

That also means the punitive award is subject to R.C. 2315.21, the statute that governs punitive damages in tort actions. Under R.C. 2315.21(C) and (D)(4), a plaintiff must prove by clear and convincing evidence that the defendant acted with malice or aggravated or egregious fraud, and under (D)(2) the court generally cannot enter judgment for punitive damages greater than twice the compensatory damages. R.C. 2315.21(A)(1)(b) expressly excludes contract claims from the definition of a "tort action," which is why a contract claim cannot get there at all.

Finally, the Court held that a claim for breach of the implied duty of good faith and fair dealing is still a contract claim. Every contract carries that implied duty, but there is no separate tort for violating it, and no punitive damages flow from it.

Why the distinction matters to injured people

If you have an injury claim against the driver who hit you, none of this touches you. Your claim is a tort from the start, and punitive damages against a drunk or reckless driver remain available on the terms we described in Punitive Damages in Ohio: When a Defendant's Conduct Is Bad Enough.

The decision matters when the defendant is your own insurance company. Your auto policy is a contract. When your insurer refuses to pay an uninsured or underinsured motorist claim, delays a med-pay claim, or lowballs a collision claim, the first thing it has done is breach a contract. After Lucarell, that breach, standing alone, can never support punitive damages, even if the adjuster's conduct was outrageous.

What Lucarell does not touch is the separate tort of insurer bad faith that Ohio recognized long ago. An insurer owes its own insured a duty of good faith in handling claims, and breaching that duty without reasonable justification is a tort, not merely a breach of contract. The decision does not mention or narrow that line of cases. The practical lesson is that a case against your own insurer must be pleaded and proven as the tort of bad faith, with evidence of the kind of conduct, such as denial without investigation, ignoring the medical evidence, or misrepresenting the policy, that shows the company had no reasonable basis for what it did. "They owed me the money and did not pay" is a contract claim; "they knew they owed me the money and refused anyway" is where a tort begins.

The second lesson: a release is a wall

Lucarell is also a decision about signatures. The Court held that a release is "an absolute bar" to any claim it covers unless the person who signed it proves fraud, duress, or other wrongdoing in obtaining it, and that duress must be proven by clear and convincing evidence, a higher standard than most civil claims. Lucarell testified she had "no choice" but to sign; the Court found that evidence "scant," pointing to the sentence in the document where she warranted she was under no economic duress.

We see the same documents in injury cases every week. An adjuster offers to pay for the car, or sends a modest check for a "minor" injury, with a release attached. People sign because they need the money or because the adjuster says it is routine. Once signed, the release does exactly what it says, and Lucarell makes clear that undoing it will require proof most people cannot muster. Our post on settling the car without releasing the injury explains how to handle the property claim without giving away the rest.

A note on the fraud claim

The Court also reinstated the trial court's dismissal of Lucarell's fraud claim, holding that projections about future earnings cannot be the basis of fraud because fraud requires a false statement of past or present fact. That rule has an echo in injury cases: an adjuster's prediction that "this is the most you will ever get" is sales talk, not a representation of fact, and it will not later undo a settlement. The protection is to get advice before relying on it.

What this means for you

Punitive damages against an insurance company are still possible in Ohio, but only through the tort of bad faith, only on clear and convincing evidence of conduct with no reasonable justification, and only within the statutory limits. A breach of the policy, however frustrating, is not enough by itself. And any release you sign along the way will be enforced as written.