Compensatory Damages

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Image courtesy of [Robert Daly] / Getty Images.

Liability policies cover damages awarded to a plaintiff for injury or loss caused by a covered act (such as negligence) committed by an insured. The damages awarded to a plaintiff are usually compensatory damages. In a small percentage of cases the plaintiff may also receive punitive damages.

As their name suggests, compensatory damages are intended to compensate a plaintiff for an injury or loss. Their purpose is to make him or her "whole".

Once an injured party has received compensatory damages, that party should be in the same position that he or she was before the injury or loss occurred. Compensatory damages are also called actual damages. The following example demonstrates the types of expenses for which a plaintiff may be indemnified as compensatory damages.

Example

Alice is a self-employed business consultant. One day Alice visits Jane, one of her clients, at Jane's office. Alice talks to Jane for an hour and then gets up to leave. She is heading to the door when she slips and falls on a wet floor. Alice suffers a severe fracture of her right leg.

Alice spends several days in a hospital. She is unable to work for two months after she returns home. Six months after her fall Alice sues Jane's company for bodily injury. A court awards Alice $75,000 in compensatory damages. The money is intended to compensate Alice for the monetary losses she has suffered as a result of her broken leg.

The damages include reimbursement for the following:

  • Past, current and future hospital, doctor, physical therapy and other medical expenses to treat Alice's broken leg.
  • Loss of income during the time Alice is unable to work. She also receives compensation for customers she lost due to her injury.
  • Cost of home visits by a nurse during Alice's recuperation
  • Cost of services provided by a housekeeper and a dog walker during the period that Alice is unable to perform these duties herself.
  • Compensation for pain and suffering. Because her injury was severe, Alice has experienced (and will continue to experience) chronic pain. The injury has also left her with a permanent limp.

Jane has insured her company under a general liability policy. The firm's liability insurer pays the $75,000 in compensatory damages the court has awarded to Alice.

Economic and Non-economic Damages

The damages Alice has received include compensation for both economic and non-economic losses. Economic losses are costs that can be substantiated by bills, receipts or other documents. Alice's medical expenses, lost income, and the costs she incurred for the nurse, housekeeper and dog walker constitute economic losses.

Non-economic damages are awarded for losses such as pain and suffering, disfigurement, humiliation, anxiety, embarrassment, inconvenience and loss of enjoyment of life. They may also include damages for loss of consortium (marital relations), companionship, love and affection when a plaintiff's spouse or other family member has died or been seriously injured.

Non-economic damages are not awarded automatically.

A court will determine whether such damages are appropriate based on the nature of the injury. In many states, a plaintiff may receive non-economic damages only if he or she is also receiving economic damages.

Because non-economic losses are subjective, the amounts are not easy to determine. Non-economic damages may be calculated using on a formula (such as three times the amount of economic damages) or some other method. The amount of damages awarded for non-economic losses may vary widely from one state to another.

Caps on Non-Economic Damages

Many states have enacted laws that limit the amount of non-economic damages a plaintiff may receive in a lawsuit. Most state caps apply only to medical malpractice suits, but some apply to all suits. In some states the cap increases or does not apply when the plaintiff has died or been seriously injured.