The Supreme Court, in a case that could transform the way damages are awarded in civil suits, heard oral arguments yesterday about whether juries should continue to have broad discretion in setting punitive damages against corporate wrongdoers.

In a courtroom packed with the corporate lawyers who have been pressing the justices for several years to impose constitutional restraints on skyrocketing punitive damage awards, the justices weighed a $1 million damage award to an Alabama woman, Cleopatra Haslip, whose insurance agent pocketed her premiums and left her without health insurance.

Punitive damages, which are strongly defended by consumer groups and plaintiffs' lawyers, are designed to punish and deter misconduct by individuals and corporations. They are awarded on top of compensatory damages, which are aimed at awarding victims for monetary losses and other actual harms such as pain and suffering.

Bruce A. Beckman, a lawyer for the insurance company, Pacific Mutual Life Insurance Co., told the court that holding the company liable for punitive damages would trample on the constitutional guarantee of "due process" because of the "standardless discretion" given juries to decide whether to award punitive damages and how large they should be.

In addition, he said, it would be unconstitutional in this case to punish a company that was itself "a victim of embezzlement" by the agent and did not benefit in any way from his misconduct.

The justices, however, appeared surprisingly unreceptive to the insurance company's arguments in Pacific Mutual Life Insurance Co. v. Haslip. In earlier decisions, a majority of court members had already criticized the punitive damages phenomenon and invited yesterday's challenge after rejecting the argument that punitive damages violate another part of the Constitution prohibiting excessive fines.

Justice Antonin Scalia noted that punitive damages have been awarded in the United States for 200 years without the suggestion that they violate the Constitution.

A number of justices also appeared critical of what Justice Sandra Day O'Connor described as Pacific Mutual's "rather curious position" that it may not be hit with punitive damage award unless it has benefited from the misconduct.

Under such reasoning, said Justice John Paul Stevens, the government might be constrained from holding companies liable for treble damages under the antitrust laws for the acts of their employees. Scalia asked whether that line of reasoning would prohibit penalties to be imposed on executives who caused their companies to violate pollution laws, even if there were no benefit to the company. Beckman said it would.

Bruce J. Ennis, defending the damages award, urged the court not to "throw settled state tort law into disarray without compelling evidence that punitive damages are excessive in a majority of cases" or that state legislatures are unwilling to heed business interests and fix any problems that may exist.

Ennis said that the instructions given to the jury in this case -- that it should take into account the "character and degree of the wrong as shown by the evidence and the necessity of preventing similar wrongs" -- has been "used in courts throughout the land" for 200 years.

But Ennis also ran into some skeptical questioning. O'Connor asked whether the jury instructions would pass constitutional muster if they simply informed the jury that they could impose punitive damages. "Even such minimal instruction as that would satisfy the due process cause," Ennis said.

"That's a very strange notion of what due process means," O'Connor shot back, adding it would leave juries with "wholly standardless discretion."

"You say the standard is telling the jury essentially that the punishment fits the crime," Scalia added. "That is what you describe as a standard? ... "

Justice Anthony M. Kennedy asked whether it would violate due process if "it could be shown in a particular state" that there was "simply no rhyme or reason for the award of damages." If the system were "truly arbitrary," Ennis replied, that might be a problem, adding it was not the case in Alabama where jury awards were routinely reduced on appeal.

The newest justice, David H. Souter, was not on the bench yesterday but will be sworn in Tuesday before the court starts its second week.