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Punitive Damages

What are Punitive Damages?

They are Additional to other Damages

Punitive damages are additional to the compensatory damages a judge or a jury may grant a plaintiff. Special damages are designed to replace “out-ofpocket” costs to the plaintiff. General damages are designed to compensate for the more ephemeral losses—such as pain and suffering; loss of consortium; or loss of care, love, and affection—to the plaintiff. Punitive damages are awarded to punish and make an example of the defendant.

Punitive Damages cannot be Insured

Generally, compensatory damages are paid for by an insurance company. Common law and many state laws or regulations prohibited insurance companies from insuring or paying punitive damages. Punitive damages must be paid for by the party against whom they are assessed.

Punitive Damages are Quasi-Criminal Assessments

Punitive damages serve a similar purpose as criminal penalties—they punish the defendant and serve to make an example of the defendant. However, because civil defendants are not afforded the same due process and procedural protections as their criminal counterparts, the imposition of punitive damages inherently includes the danger of arbitrary and excessive deprivation of property. This problem is exacerbated when the decision maker, usually a jury, has also been presented with the inflammatory evidence necessary to merit the imposition of punitive damages. For an example of bad behavior that can lead to the imposition of punitive damages, read the facts in State Farm v. Campbell et al., 538 U.S. 416 (2003). Because of their quasi-criminal nature and the potential for abuse or mistake, the threat of punitive damages touches a red hot button for many people, especially the business community. This entry will look at the type of claims that cause courts and juries to award punitive damages, the Supreme Court's theory of ratio of punitive damages to compensatory damages, and some open issues.

One Legislature's Definition

California's Civil Codes § 3294 is an example of how a state's legislature codifies punitive damages. It states, in salient part, the following:

In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

Punitive Damages Generally Require a Tortious Act

The statute requires the alleged offensive act to arise from a tort, not a contract. These are two very different theories of law. A tort is an offense against an individual. A breach of contract is where a party is alleged to have broken its contractual obligation. This definitional difference can be dangerously simplistic and tricky.

One area of law where these two legal theories blend involves the duty of parties to exercise “good faith and fair dealing” in a contract. If one of the parties had larceny in his or her heart when entering into a contract and used some device to take advantage of the other party (or parties) to the contract, the aggrieved party could claim that the offensive party lacked the requisite “good faith.” In a lawsuit, the aggrieved party would allege a “breach of the covenant to deal fairly and in good faith.” Although this breach arises in a contract setting, the breach of this duty has been routinely defined as a tort. Therefore, in the case of California's statute on punitive damages, while there can be no punitive damages for the breach of the contract, there can be punitive damages for the tort. So the aggrieved party can claim punitive damages for the breach of the duty to deal fairly and in good faith but not for the breach of the contract.

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