What Are Compensatory Damages?

Compensatory damages are monetary awards awarded to a plaintiff that are designed to compensate them for any loss or harm.
Important Takeaways
  • Compensatory damages reimburse a party that has experienced harm or injury caused by another party.
  • Compensatory damages cannot exceed the real cost of the harm or injury.
  • Courts assess punitive damages to penalize a person who deliberately or carelessly causes harm or injury to another party.
  • In rare situations, a court may award a plaintiff compensatory and punitive damages.

How Do Compensatory Damages Work?

A court awards compensatory damages when it determines that a defendant is accountable for loss or injury to another person.

1 Normally, compensatory damages judgments involve monetary compensation, at an amount the court judges sufficient to make the affected party whole again. Courts compute compensatory damages based on the amount of real losses. 

To get compensatory damages, a plaintiff must establish they experienced harm, an injury, or some other sort of loss. To compute the compensation, the court analyzes variables such as spent expenditures, lost income, and the market value of damaged or destroyed property. A court may impose compensatory damages for violation of contract or actual damages inflicted to a person or property.

Example of Compensatory Damages

For example, in 1989, the ship Exxon Valdez hit a reef in Alaska’s Prince William Sound, resulting in an oil leak that caused enormous damage and devastation. The oil killed harbor seals, sea otters, and whales, along with hundreds of thousands of birds, including bald eagles. It also harmed commercial fisheries, leisure areas and tourism, inflicting economic losses.

The Exxon Valdez oil disaster spawned hundreds of legal cases, brought to court in a class-action lawsuit. The jury decided for the plaintiffs, giving them $287 million in compensatory damages.

In rare situations, a court may award compensatory damages in an amount that exceeds the plaintiff’s request. A court may also restrict a compensatory damages judgment if it finds the plaintiff accountable for some of the losses. Such was the situation in the Liebeck v. McDonald's Restaurants verdict.

In the 1990s, an elderly lady called Stella Liebeck requested a cup of coffee through the drive-through window of a McDonald’s restaurant. Once the driver stopped the vehicle, Liebeck ripped the lid off the coffee cup and poured the hot coffee on herself, inflicting third-degree burns to 16% of her body, making her incapacitated for more than two years. After originally spending eight days in the hospital, Liebeck had scarring, which needed skin grafting.

Liebeck sued McDonald’s, and her counsel stated that the coffee was dangerously hot. In fact, her lawyer supplied proof that over the 10-year period preceding up to Liebeck’s accident, over 700 others also had serious burns from McDonald’s coffee. The plaintiff triumphed and the jury awarded Liebeck $200,000 in compensatory damages. But they then decreased the sum to $160,000 since they considered she was 20% responsible for her injuries. 

Compensatory Damages vs. Punitive Damages

Compensatory damages relate to real monetary losses. For example, a person wounded owing to another person’s carelessness can sue the offender for the expense of medical bills and lost earnings. On the other side, courts award punitive damages as punishment. Normally, a court gives this form of judgment when it concludes that the defendant knowingly caused injury or participated in willful wrongdoing.

For instance, in the Exxon Valdez case, the jury awarded the plaintiffs $5 billion in punitive penalties. On appeal, the court lowered that judgement to $507.5 million. 3 In the McDonald’s case, the jury awarded Ms. Liebeck punitive damages of $2.7 million, before the judge lowered the amount to $480,000.

Compensatory awards require the plaintiff to establish they incurred loss or injury. To get punitive damages, the plaintiff must establish that the perpetrator acted knowingly or in a wilfully negligent way. According to Cornell Law School, judges impose punitive damages in barely 5% of civil disputes. 

Limitations on punitive damages vary by state. For example, Florida law restricts punitive damages payments at three times the compensatory damages amount or $500,000. 6 Oklahoma restricts punitive damages judgments to the same amount as the compensatory damages award or $100,000. Nevertheless, certain jurisdictions, notably California, do not restrict punitive damages payments.


Compensatory Damages Punitive Damages
Awarded to compensate a plaintiff for actual losses Awarded to punish a defendant for negligence or intentional harm
Defendant must prove they suffered harm or injury Defendant must prove they suffered harm due to intentional wrongdoing or willful negligence
Awards limited to actual damages Award limits vary by state
Subject to reduction by the trial judge or on appeal Subject to reduction by the trial judge or on appeal

Alternatives to Compensatory Damages

In rare circumstances, litigants elect to forgo the expense of a trial and settle out of court. When parties select a settlement, they dismiss the action and come to an agreement privately. Conditions of settlements vary and, depending on the kind of dispute, may or may not entail money.

In the McDonald’s hot coffee case, Liebeck’s legal team offered to settle the dispute for $20,000, but the corporation refused. The plaintiff triumphed and McDonald’s had to pay a total $640,000 in compensation and punitive damages. 

In many circumstances, judgements and settlements are taxable. Judgments and settlements obtained for bodily injuries, physical diseases, and other discrimination cases are non-taxable.

Commonly Asked Questions (FAQs)

What are the two forms of compensatory damages?

There are general damages, which include losses that are direct and immediate results of a violation or breach of contract, and special, or consequential, damages that do not relate to breaches of contract.

What is the difference between compensatory and punitive damages?

Compensatory damages are normally paid to recompense victims, whereas punitive damages are awarded to penalize individuals with illegal action and are frequently supplementary to compensatory damages.