Compensatory vs. Punitive Damages: What Each Pays For

Compensatory damages pay for proven loss. Punitive damages can be added on top when conduct is especially harmful.

The Short Answer

Compensatory damages, also called actual damages, pay for the loss a person actually suffered, such as lost wages, expenses, damaged property, and in some cases, emotional distress. Punitive damages are added on top in some cases where the defendant's conduct was especially harmful. The Supreme Court of the United States has said that large ratios of punitive to compensatory damages raise due process problems.

In the guides we publish here, readers reviewing settlement offers often want to know what each category of money represents before they agree to terms. Knowing which is which shows what a settlement offer is paying for.

Because the standards differ, a claim can succeed on actual losses without meeting the bar for punitive damages.

Compensatory Damages vs. Punitive Damages at a Glance

What Compensatory Damages Cover

Compensatory damages are damages awarded by a court equivalent to the loss a party suffered, according to the Cornell Law School Legal Information Institute (LII) Wex entry on compensatory damages. The Supreme Court of the United States treated the terms compensatory damages and actual damages as the same in the 1876 decision Birdsall v. Coolidge. These damages exist to address proven harm, loss, or injury.

Courts measure compensatory damages by examining specific losses that can be documented and proven. When property is damaged or destroyed, the loss is commonly measured by the fair market value of that property. Compensatory awards can include lost wages or income and necessary expenses incurred as a result of the harm.

Compensatory damages can also encompass emotional distress, although emotional harm is hard to value and courts apply standards for it inconsistently. A court may award nominal damages instead, covered below. Receiving compensatory damages does not prevent a plaintiff from also receiving punitive damages if the underlying conduct meets the legal standard for punishment.

When Punitive Damages Enter the Case

Punitive damages are awarded in addition to actual damages in some circumstances where the defendant's conduct is especially harmful, as explained by the Cornell Law School LII Wex entry on punitive damages.

In tort claims, obtaining punitive damages generally requires the plaintiff to prove that the defendant committed an intentional tort or engaged in wanton and willful misconduct. The precise legal threshold differs by jurisdiction. For example, in Arkansas, the standard requires showing that the defendant proceeded intentionally with an unlawful action after knowing that the act was likely to cause injury. Because statutory definitions and court interpretations vary by state, a licensed attorney can confirm the local standard.

Punitive damages are generally not awarded for a simple breach of contract, as Wex notes while citing an Ohio case. Additionally, courts may be reluctant to award punitive damages against a principal, such as an employer, solely for the reckless acts of an agent or employee. An exception to this general reluctance exists when the principal actively encouraged or directly caused the agent's recklessness.

Constitutional Limits on Punitive Awards

The Supreme Court of the United States has held that punitive damages are limited by principles of due process. In State Farm Mutual Automobile Insurance Co. v. Campbell (2003), the Court declined to impose a bright-line ratio that a punitive damages award cannot exceed, but said that single-digit multipliers are more likely to comport with due process.

Where compensatory damages are substantial, the Court said a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of due process.

To evaluate whether a punitive award crosses constitutional boundaries, courts rely on three guideposts originally established in BMW v. Gore and restated in State Farm v. Campbell. Courts assess the degree of reprehensibility of the defendant's misconduct, the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award, and the difference between the award and civil penalties authorized or imposed in comparable cases.

How Damages Function in Settlements

Compensatory damages are the core of most negotiated settlements in civil litigation. Settlement amounts are negotiated between the parties. Timing is covered in how long a settlement takes.

Settlement ranges are discussed in our guides to workplace harassment settlement amounts, wrongful termination settlement amounts, and workplace retaliation settlement amounts.

Many states and specific statutes enforce statutory caps that limit damages, including punitive damages, in particular categories of claims. Because state caps vary and change over time, parties should verify current rules for their specific claim type with a licensed attorney. Taxes on settlement money vary, as explained in our guide covering whether settlements are taxable.

Nominal Damages and the Three Constitutional Guideposts

In State Farm v. Campbell, 538 U.S. 408 (2003), the Supreme Court restated three guideposts from BMW v. Gore.

Reprehensibility means how bad the conduct was. Disparity means the gap between the harm and the punitive award. Comparable penalties refer to what the law sets for similar misconduct.

Which Category Fits Your Facts

Whether punitive damages are sought alongside compensatory damages turns on the conduct alleged, because punitive damages generally require an intentional tort or wanton and willful misconduct. Compensatory damages cover proven loss such as lost wages, expenses and damaged property.

You should verify your claim requirements under your state's laws with a licensed attorney before filing.

If you are evaluating whether your claim supports one or both forms of recovery, you can research substantive protections under workplace harassment, wrongful termination, or data breach claims. When entering legal proceedings, individuals can consult counsel regarding a contingency fee agreement.

Verdict

Compensatory damages address proven harm, loss, or injury. Punitive damages generally require an intentional tort or wanton and willful misconduct where conduct is especially harmful. Statutory damage caps or differing state legal standards can change this evaluation. This comparison cannot tell you whether a specific claim supports punitive damages; a licensed attorney can.

Frequently Asked Questions

What is the difference between compensatory and punitive damages?

Compensatory damages pay for the actual harm or loss a person suffered, including lost wages, property damage, and necessary expenses incurred. Punitive damages are separate monetary awards added in some cases where a defendant's conduct was especially harmful.

Can you get punitive damages without compensatory damages?

Rules regarding whether punitive damages require an award of actual compensatory damages vary by state and claim type. You should verify the specific requirements for your jurisdiction with a licensed attorney.

What are compensatory damages vs actual damages?

Compensatory damages and actual damages are two names for the same thing. In Birdsall v. Coolidge (1876), the Supreme Court of the United States treated the two terms as the same.

Are punitive damages taxable?

Tax treatment varies, and no single rule is stated here. The guide on whether settlements are taxable covers settlement tax questions, and a licensed attorney can confirm what applies.

Is there a limit on punitive damages?

Yes. Due process limits punitive awards, though the Court declined to set a bright-line ratio, and many states impose statutory caps. In State Farm v. Campbell (2003), the Supreme Court of the United States stated that single-digit multipliers between punitive and compensatory damages are more likely to comport with due process, and many individual states impose statutory caps on awards.

Can an employer be ordered to pay punitive damages for an employee's reckless act?

Courts may be reluctant to award punitive damages against a principal, such as an employer, for the reckless acts of an agent. According to the Cornell Legal Information Institute Wex entry on punitive damages, an exception applies where the principal encourages or causes the recklessness. The governing rules vary by state and claim. To determine how these legal standards apply to a particular situation, a licensed attorney can confirm the requirements in your jurisdiction.

Are punitive damages available for a breach of contract?

Punitive damages are generally not awarded for a breach of contract. As explained by Cornell LII Wex in its entry on punitive damages, courts generally do not award punitive damages for a breach of contract, citing an Ohio case. In tort cases, the plaintiff generally must prove an intentional tort, wanton and willful misconduct, or both. These legal standards vary by state. If you have questions, a licensed attorney can confirm what applies to your situation.

What are nominal damages?

Nominal damages may be awarded when a right was violated but no real harm is shown. A court may award them instead of compensatory damages.

Punitive damages vs compensatory damages: which is bigger?

Whether punitive damages exceed compensatory damages depends on the specific facts of each case, state statutory limits, and judicial review. Neither is automatically larger. The Supreme Court noted that single-digit multipliers are more likely to comport with due process and where compensatory damages are substantial, the Court said a ratio perhaps only equal to compensatory damages can reach the outermost limit of due process.