Punitive Damages: What They Are and How They Work

Punitive damages are designed to punish a defendant and deter bad conduct. Unlike most compensatory damages for civil suits, the purpose of punitive damages is not to make the plaintiff whole, but to punish the defendant. Punitive damages are not awarded in every civil case and most states have strict rules and limitations on when punitive damages will be allowed. There may also be caps in place that limit punitive damage awards to no more than 2 or 3 times the amount of actual damages.

Understanding Punitive Damages

When a plaintiff sues someone for hurting him, whether intentional or not, tort law allows the plaintiff to recover for losses, including medical costs, unearned income due to missed work, pain and suffering, and emotional distress. All of these damages are based on how much the plaintiff has suffered and the amount he needs in order to resume life as it was before he was hurt. Punitive damages, on the other hand, are not awarded to compensate the plaintiff. The purpose of punitive damages is to deter bad actions on the part of possible future defendants and to make sure the defendant is appropriately punished for any wrongdoing.

Examples of Punitive Damage Awards

If a drug company willingly lied to a plaintiff about the safety of a drug and the plaintiff only suffered $1,000 in damages, paying the $1,000 in actual damages to the plaintiff would likely be a very small hit to the drug company. However, if the judge or jury wanted to make sure the drug company didn’t lie to customers again about the safety of a drug, they might order $1,000,000 in punitive damages. This amount would encourage the drug company to take disclosures about drug safety more seriously.

Taxation of Punitive Damages

The amount is taxable. If you are seriously injured in a car accident, suffering permanent loss of your left arm, where the other driver of a municipal bus is at fault — having several prior DUIs on his record, and you received $60K in compensatory damages and $1 million in punitive damages, you are paying tax on the $1 million.

When Punitive Damages are Awarded

While punitive damages do serve an important purpose, some believe they can get out of control. As such, punitive damages are limited in many states to situations of gross negligence, intent, negligence caused by economic reasons, or negligence motivated by fraud. Many states will also cap the amount of punitive damages, if the law allows it.

There also are some preliminary limits on receiving punitive damages.  For instance, a plaintiff may not be awarded a punitive damages award unless they can prove compensatory or special damages.  This means that a court will not punish anyone for being grossly negligent, when this negligence did not bring actual harm to the plaintiff.  Further, in order to receive a punitive damages award, the defendants conduct generally must have directly injured the plaintiff.

When determining a punitive damage award at trial, a court will generally submit a rigorous analysis to determine if punitive damages are justified. This often includes comparing the amount of the damages being requested, with the amount the plaintiff actually suffered; comparing similar cases in which punitive damages have been awarded, and analyzing the level of the bad behavior of the defendant.  In especially egregious cases, in which the conduct of the defendant is exceptionally offensive, or where there are severe emotional or psychological injuries that are hard to prove, the court may justify awarding larger-than-average punitive damage awards.

However, advocates of tort reform law argue that the current standards among states are not high enough, and that punitive damages should be limited to those cases in which actual malice is shown.  While large punitive damages awards are rarely given in practice, advocates of tort reform law argue that the threat of punitive damages itself has a negative effect on cases that settle.  Many cases, up to 98%, settle out of court.  However, when settling a tort claim, a defendant must take the threat of punitive damages into consideration.  Tort reform advocates argue that as a result of the low standards to prove punitive damages, such as “gross negligence,” plaintiffs are too often able to collect a windfall on their claim in settlement negotiations.

U.S. Supreme Court Limits on Punitive Damages

Along these same lines, the U.S. Supreme Court has recently held that some types of punitive damage awards are unconstitutional as they are a violation of Due Process.  While the Supreme Court has not offered a specific formula for the states’ to follow when calculating punitive damages, it has said that punitive damages are unconstitutional if they are unreasonable and disproportionate. The Court, however, has suggested that very few cases in practice will justify awarding a ratio higher than a single digit between compensatory damages and punitive damages. This means that if the plaintiffs compensatory (or actual) damages were $100,000, an additional award of $1,000,000 in punitive damages, a ratio of 10:1, would generally be unreasonable and disproportionate, unless the case was especially egregious.

Case Studies: Examples of Punitive Damages

Case Study 1: Deceptive Drug Company

John filed a lawsuit against Pharma Corp, a pharmaceutical company that deliberately deceived him regarding the safety of a drug, causing $1,000 in damages. In order to discourage future deceptive practices, the court granted punitive damages of $1,000,000.

Case Study 2: Severe Car Accident

Sarah experienced a permanent loss of her left arm as a result of a car accident caused by Mark, a municipal bus driver with prior DUIs. She was awarded $60,000 in compensatory damages, along with $1 million in punitive damages, which are subject to taxation.

Case Study 3: Limitations on Punitive Damages

John’s case serves as an example of the limitations imposed on punitive damages. When cases involve gross negligence, intent, or fraud, punitive damages may be awarded. However, state laws often set caps, restricting punitive damages to 2-3 times the actual damages.

Case Study 4: U.S. Supreme Court’s Perspective 

Sarah’s case sheds light on the viewpoint of the U.S. Supreme Court regarding punitive damages. The Court considers punitive damages unconstitutional if they are deemed unreasonable and disproportionate. Generally, a single-digit ratio between compensatory and punitive damages is accepted, unless the misconduct is exceptionally egregious.