Punitive Damages

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Punitive damages may be awarded in a civil lawsuit that seeks compensation for injury caused by a faulty product, a tort (such as negligence or libel), or breach of a contract. They have two purposes: to punish a wrongdoer for bad behavior and to deter others from behaving in a similar manner. Punitive damages are also called exemplary damages.

While large punitive damages awards may generate buzz in the media, they are relatively rare.

A 2011 report by the Bureau of Justice Statistics showed that punitive damages were sought in only 12% of the 25,000 civil trials conducted in state courts in 2005. While plaintiffs won in 14,359 of the trials, only 5% of them received punitive damages.

Differ From Compensatory Damages

Punitive damages differ from compensatory (normal) damages. Compensatory damages are designed to compensate someone for an injury that party has suffered due to an act committed by someone else. Their purpose is to make the injured party "whole." In contrast, punitive damages are designed  to punish. They are usually awarded in addition to compensatory damages. In most states, a plaintiff cannot obtain punitive damages without first proving that the defendant is liable for compensatory damages.

Awarded for Extreme Behavior

Punitive damages may be awarded when the defendant has acted outrageously or committed extreme misbehavior.

The defendant's actions must go well beyond simple negligence. The specific acts that a plaintiff must prove to receive punitive damages vary from state to state. Generally, the plaintiff must show that the defendant committed fraud, malice, oppression, or a willful or wanton act.

Here are examples of egregious acts that might lead to a punitive damages award:

  • A patient enters a hospital to have his left kidney removed because it is diseased. The surgeon is drunk when he performs the surgery and removes the right kidney by mistake.
  • A house painter is seriously injured when the ladder on which he is standing collapses. Prior to the accident, the ladder manufacturer had been notified of numerous incidences where its ladders had collapsed. Yet, the manufacturer had done nothing to fix the problem.
  • A pickup driver (Jim) becomes enraged after the driver of a car (Bob) cuts him off. Jim drives recklessly in an effort to cut off Bob. Jim rear-ends Bob's car, causing an accident in which Bob is seriously injured.

Size of Awards

The amount of money that may be awarded as punitive damages varies widely from state to state. Some states have enacted laws that limit the award to a specific dollar amount (such as $500,000) or a certain multiple of the compensatory damages. Some states use both types of caps. These caps may apply only to certain types of cases. For instance, a cap of three times the compensatory damages amount may apply only to lawsuits involving pollutants.

Many states do not impose caps on punitive damages. In these states an award for punitive damages may far exceed the amount awarded in compensatory damages.

Are Punitive Damages Insurable?

Whether punitive damages are covered by liability policies largely depends on two factors: state laws and policy language.

State Laws

About a third of the states in the U.S. have enacted laws prohibiting insurance policies that cover punitive damages. The prohibitions generally apply to damages based on a defendant's direct liability. In other words, the laws typically bar insurance from covering punitive damages if the damages are levied against a defendant for acts committed by the defendant. The laws may not apply to punitive damages based on vicarious liability.

For example, consider the vehicle accident described above. Suppose the accident occurred while Jim (the pickup driver) was traveling to a job site on behalf of his employer. The pickup is owned by Jim's employer.

After the accident, Bob sues both Jim and Jim's employer for bodily injury. Bob is awarded both compensatory damages and punitive damages. Punitive damages assessed against Jim's employer are based on vicarious liability (the employer is liable for acts of its employee). Thus, in many states punitive damages assessed against the employer could be covered by the employer's commercial auto policy.

Policy Wording

Most general liability and commercial auto policies make no mention of punitive damages. The same is true of many commercial umbrella policies. When policies don't specifically exclude punitive damages, such damages are generally covered (if coverage for such damages is permitted by law).

In contrast to standard liability policies, many errors and omissions policies either include or exclude punitive damages. A policy may exclude coverage by way of a specific exclusion (in the Exclusions section) or in a defined term such as damages or loss. A policy definition may also be used to cover punitive damages. For example, a policy may state that the term damages includes punitive or exemplary damages where insurance of such damages is permitted by law.