Punitive Damages

What Are Punitive Damages?

Punitive damages are the payment that a defendant found guilty of committing a wrong or offense is ordered to pay on top of compensatory damages. They are awarded when compensatory damages—the money given to the injured party—are deemed to be insufficient.

Punitive damages go beyond compensating the aggrieved party. They are specifically designed to punish defendants whose conduct is considered grossly negligent or intentional. Punitive damages are also referred to as exemplary damages as they are intended to set an example to deter others from committing similar acts.

Key Takeaways

  • Punitive damages are legal recompense that a defendant found guilty of committing a wrong or offense is ordered to pay on top of compensatory damages.
  • They are awarded by a court of law not to compensate injured plaintiffs but to punish defendants whose conduct is considered grossly negligent or intentional.
  • It is hoped that making the perpetrator pay a sum stretching beyond compensatory damages will deter both the defendant and others from committing similar misdeeds in the future.
  • A typical cap on punitive damages is four times the amount of compensatory damages.
  • Criteria for punitive damages differs from state to state, with some more likely to award punitive damages than others.

What Is the Purpose of Punitive Damages?

Punitive damages are given with other damages, never alone, and increase a plaintiff’s award. In short, they offer a way to dish out extra punishment to the defendant for their conduct.

It is hoped that making the perpetrator pay a sum stretching beyond compensatory damages will deter the defendant and others from committing similar misdeeds in the future. In the case of a personal injury claim, punitive damages may be added to compensatory damages, which cover the victim’s medical bills, hospital expenses, property damage, and other fees. 

Example of Punitive Damages

Suppose a weight loss company advertises its dietary supplements as all-natural and safe. A customer then takes the supplements and becomes violently ill. The customer’s doctor determines the supplements reacted with the customer’s prescription medication to cause the illness. 

The customer files a civil lawsuit against the weight loss company to cover their medical expenses and lost wages, claiming the company should have known the supplements would react with prescription medication and should have issued a warning about these risks. The court decides in the customer’s favor and awards both compensatory damages, to cover the victims expenses, and punitive damages to deter the company from repeating the conduct.

What Factors Influence Punitive Damages?

Before awarding punitive damages, the court must take several factors into account. The following points are of particular importance:

  • Assessing if the defendant’s actions were malicious, intentional, or grossly negligent.
  • Looking at similar cases to determine if punitive damages were awarded.

It is worth pointing out that the application of punitive damages varies, depending on the state. Each state adopts different criteria and some are more likely to award punitive damages than others.

What Is the Cap on Punitive Damages?

The Supreme Court and the states provide guidelines for calculating punitive damages. Although there is no maximum sum, punitive damages typically do not exceed four times the amount of compensatory damages.

For example, if a plaintiff recovers $100,000 in compensatory damages and is awarded punitive damages, they most likely will receive up to $400,000 in punitive damages.

There are exceptions, though. If a defendant’s actions are especially reprehensible, the harm suffered by the plaintiff is greater than the punitive damages requested, or amounts awarded in similar cases are greater, higher punitive damages may be awarded.

Greater punitive damages might also be given if non-economic harm is difficult to calculate, injuries are hard to detect and could prompt a need for continuous care, or if the defendant’s conduct is extraordinarily offensive. Regardless of the award, the defendant is always given fair notice for the amount of punitive damages and the conduct justifying the award.

Real-Life Example of Punitive Damages

One of the most famous punitive damage cases in the United States occurred in 1992. Stella Liebeck of New Mexico was badly injured with second and third-degree burns when a cup of coffee she purchased at a McDonald’s Corp. drive-through spilled on her lap after her grandson stopped the car she was sitting in so that she could add sugar and cream.

Liebeck spent eight days in the hospital and then reportedly asked McDonald’s for $20,000 to cover her medical bills. The fast-food chain refused, prompting Liebeck to sue.

During the discovery phase of the litigation, it emerged that McDonald's had faced over 700 similar claims in the 10 years leading to Liebeck’s incident. Those claims suggested that the company was aware of the dangers linked to the high temperatures of its coffee. It was also revealed that rival firms, as well as people at home, served coffee at cooler temperatures.

In the end, Liebeck was awarded $200,000 in compensatory damages—later cut to $160,000 after the jury determined that she was responsible for 20% of the spill—and $2.7 million in punitive damages—later reduced to $480,000 to cap Liebeck's award at three times what she won for compensatory damages. McDonald's was forced to pay and responded by lowering the temperatures of its coffees.

What Is the Difference Between Punitive Damages and Compensatory Damages?

The purpose of compensatory damages is to compensate the victim of any harm or wrongdoing. Punitive damages are given on top of compensatory damages when the misconduct was deemed grossly negligent, intentional, or malicious. These are designed to deter the defendant from repeating harm or misconduct in the future.

What Is Another Name for Punitive Damages?

Exemplary damages are another term used interchangeably with punitive damages. These are put in place to punish the defendant and deter them and others from repeating misconduct.

What Must the Court Consider In Reviewing Punitive Damages?

The following considerations are of primary importance when the court reviews punitive damages:

1) The degree to which the defendants actions were negligent, malicious, or intentional

2) Whether or not similar cases awarded punitive damages

How Often Are Punitive Damages Awarded?

Overall, roughly 5% of verdicts are awarded punitive damages. Typically they do not exceed four times the amount of compensatory damages, although punitive damage caps vary by state.

Are Punitive Damages Taxable?

Generally speaking, punitive damages are taxed as 'Other Income'. There are some exceptions including personal injury or physical illness settlements, among others.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Cornell Law School. "Punitive Damages."

  2. Internal Revenue Service. "Settlements⁠—Taxability."

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