What Are Exemplary or Punitive Damages?
In this month’s blog I will discuss exemplary damages, which are more commonly known as punitive damages.
Before I delve too deeply into punitive damages, let’s look at a primary reason we buy an insurance policy – liability coverage for compensatory damages. A definition of Compensatory Damages from Investopedia 1:
Money awarded to a plaintiff to compensate for damages, injury, or another incurred loss. Compensatory damages are awarded in civil court cases where loss has occurred as a result of the negligence or unlawful conduct of another party. To receive compensatory damages the plaintiff has to prove that a loss occurred, and that it was attributable to the defendant. The plaintiff must also be able to quantify the amount of loss in the eyes of the jury or judge.
In most liability claims, the defendant can held responsible for compensating a plaintiff for actual damages suffered as a result of the defendant’s negligence. The two types of compensatory damages are defined as Special Damages and General Damages.
Special Damages are intended to place the plaintiff back in the same financial position as he/she was prior to the loss. Simple Special Damages examples include:
- After a snowstorm your client slips and falls on your unshoveled and unsanded front steps. Compensatory damages can be claimed for medical bills and loss of income while the plaintiff is out of work recovering
- Your business guaranteed delivery of a critical part to your client by a certain date. The part was not delivered on time, thus requiring the plaintiff to purchase the part from another company - at a much higher price. Depending on the delivery contract guarantee, your business may be responsible for the difference in price and, potentially, additional damages if the plaintiff was adversely impacted in another way (reputational, fines, etc.)
The other type of compensatory damage claim is for General Damages. General Damages may be awarded if someone has suffered specific, personal harm. Examples of these types of losses include:
- Emotional distress
- Loss of consortium (sometimes known as loss of companionship)
- Pain and suffering
- Defamation or loss of reputation
- Loss of enjoyment of life
- Impairment of physical or mental capacity
OK, so what about Punitive Damages? One definition, from an Insurance Services Office (ISO) based insurance policy, is as follows:
Punitive damages means a monetary award imposed to punish a wrongdoer and to deter others from similar conduct. It includes exemplary damages. It also includes any damages, or penalties, based upon any legal theory that requires proof of the same standard of conduct necessary to support an award of punitive damages or exemplary damages, under the law of the state in which they are awarded.
Punitive damages are typically NOT covered by personal lines insurance policies (automobile; homeowners; umbrella), so this article focuses on business insurance.
Punitive damages may be awarded in those cases where the defendant’s actions have been found to be egregious, intentional, malicious, reckless, outrageous, or especially harmful. Punitive damages are awarded to punish a defendant and to deter future acts. Punitive damages are not awarded for or meant to enrich a plaintiff. However the plaintiff is indeed the one who receives the award from the defendant.
Typically, intentional misconduct or gross negligence is required before punitive damages can be claimed or awarded. Gross negligence is actually a legal standard. Here is one definition, from Law.com:
- carelessness which is in reckless disregard for the safety or lives of others, and is so great it appears to be a conscious violation of other people's rights to safety. It is more than simple inadvertence, but it is just shy of being intentionally evil. If a judge or jury finds gross negligence, it can result in the award of punitive damages on top of general and special damages.
Many states place limitations on punitive damage monetary awards. Sometimes the limitation will be some percentage of the compensatory claim (e.g. no more than three (3) times the compensatory damage award). Other times it may be a maximum monetary cap, generally defined by state statutes (e.g. no more than $500,000).
Punitive damages are typically not awarded in contract disputes. One exception to this, however, is an insurance company’s “bad faith” claim. This occurs when an insurer's breach of contract is so egregious and it is therefore considered a tort cause of action.
One particularly famous punitive damage award was that of Liebeck vs. McDonalds. The plaintiff spilled coffee in her lap and that caused extremely serious burns. The plaintiff asked McDonalds pay her medical bills but McDonald's refused, so the plaintiff sued. During the case it was discovered that McDonalds had many similar hot coffee spill claims. As a result, the jury found McDonalds guilty of knowingly serving a dangerous product without doing anything to correct a known problem. The jury awarded the plaintiff $2,700,000 in punitive damages. However, as with a significant number of punitive damages awards, a judge reduced the award substantially (down to $480,000).
As a business owner, it is important to understand your state’s statutes and laws regarding punitive damages. I have included Minnesota’s Punitive Damages statutes at the end of this article. Additionally, it is critical to understand:
- Whether your business insurance policy will respond to a punitive damages claim
- Whether your state allows punitive damages to be paid by the business owners insurance policies
Any time a claim against your business finds its way to a court of law, there is always the possibility of a significant monetary award against you. Some awards can be large enough to put the business into bankruptcy, or worse. Understanding this exposure to your business, caused by a potential punitive damages award, is truly important. This is a case where consulting with a knowledgeable business insurance agent or business insurance broker is a wise idea.
One final comment: If you happen to be the recipient of a punitive damages award, did you know that the IRS has ruled punitive damages are considered as taxable income? Yes, they do, so don’t spend your check too quickly.
Happy insurance shopping!
2015 Minnesota Statutes - 549.20 PUNITIVE DAMAGES
Subdivision 1. Standard. (a) Punitive damages shall be allowed in civil actions only upon clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others.
(b) A defendant has acted with deliberate disregard for the rights or safety of others if the defendant has knowledge of facts or intentionally disregards facts that create a high probability of injury to the rights or safety of others and:
(1) deliberately proceeds to act in conscious or intentional disregard of the high degree of probability of injury to the rights or safety of others; or
(2) deliberately proceeds to act with indifference to the high probability of injury to the rights or safety of others.
Subdivision 2. Master and principal. Punitive damages can properly be awarded against a master or principal because of an act done by an agent only if:
(1) the principal authorized the doing and the manner of the act;
(2) the agent was unfit and the principal deliberately disregarded a high probability that the agent was unfit;
(3) the agent was employed in a managerial capacity with authority to establish policy and make planning level decisions for the principal and was acting in the scope of that employment; or
(4) the principal or a managerial agent of the principal, described in clause (3), ratified or approved the act while knowing of its character and probable consequences.
Subdivision 3. Factors. Any award of punitive damages shall be measured by those factors which justly bear upon the purpose of punitive damages, including the seriousness of hazard to the public arising from the defendant's misconduct, the profitability of the misconduct to the defendant, the duration of the misconduct and any concealment of it, the degree of the defendant's awareness of the hazard and of its excessiveness, the attitude and conduct of the defendant upon discovery of the misconduct, the number and level of employees involved in causing or concealing the misconduct, the financial condition of the defendant, and the total effect of other punishment likely to be imposed upon the defendant as a result of the misconduct, including compensatory and punitive damage awards to the plaintiff and other similarly situated persons, and the severity of any criminal penalty to which the defendant may be subject.
Subdivision 4. Separate proceeding. In a civil action in which punitive damages are sought, the trier of fact shall, if requested by any of the parties, first determine whether compensatory damages are to be awarded. Evidence of the financial condition of the defendant and other evidence relevant only to punitive damages is not admissible in that proceeding. After a determination has been made, the trier of fact shall, in a separate proceeding, determine whether and in what amount punitive damages will be awarded.
Subdivision 5. Judicial review. The court shall specifically review the punitive damages award in light of the factors set forth in subdivision 3 and shall make specific findings with respect to them. The appellate court, if any, also shall review the award in light of the factors set forth in that subdivision. Nothing in this section may be construed to restrict either court's authority to limit punitive damages.
Jonathan Farris is a retired insurance executive and president of InsuranceRescue Services, LLC, a property & casualty insurance consulting firm based in Madison, Wisconsin. Mr. Farris can be reached at firstname.lastname@example.org.