Property and Casualty Insurance · Casualty Insurance · 5 min read
Compensation and Punitive Awards
- Differentiate between compensatory damages and punitive damages in casualty insurance claims.
- Distinguish between special damages (economic) and general damages (non-economic) with concrete examples.
- Explain how state law, public policy, and standard policy language affect liability insurance coverage for punitive awards.
Overview of Damages in Civil Liability
In casualty insurance, damages are money awarded for a civil wrong. An insured person or business may become legally liable for harm to another person based on negligence or another legal basis, such as strict liability. When a claim or lawsuit arises, damages are commonly classified into two main categories: compensatory damages and punitive damages.
Compensatory damages address the claimant's losses, while punitive damages punish certain misconduct. Compensatory damages are designed to indemnify an injured person for actual losses sustained, aiming to make the injured person whole, as far as money can, for both economic and noneconomic losses. Compensatory damages include both special and general damages, whereas punitive damages stand apart from compensation entirely.
Many liability awards include compensatory damages, while punitive damages are far less common and are awarded only when applicable law permits them. Standard liability insurance policies are designed primarily to pay compensatory damages on behalf of the insured. Understanding how courts classify these sums is a fundamental concept on casualty licensing exams.
Common mistakes
- Believing that general damages punish the defendant because they lack exact bills, forgetting that general damages are compensatory and indemnify for intangible losses.
- Assuming that simple negligence can trigger a punitive damages award, when punitive damages always require heightened misconduct such as gross negligence, malice, or reckless disregard.
- Assuming all insurance policies automatically pay punitive damages nationwide, overlooking that some state laws prohibit insuring them on public policy grounds and some policies explicitly exclude them.
- Confusing special damages with general damages on exam questions by failing to check whether the loss is an economic out-of-pocket cost or an intangible human loss.
Key points
- Damages are monetary awards in civil claims: compensatory damages address a claimant's losses, while punitive damages, where permitted, punish a wrongdoer.
- Compensatory damages are subdivided into special (economic) damages and general (non-economic) damages.
- Special damages cover measurable financial losses backed by documentation, such as medical bills, lost wages, future earning capacity loss, and property repairs.
- General damages compensate for intangible losses without fixed price tags, including pain and suffering, emotional distress, physical impairment, and loss of enjoyment of life.
- Punitive (exemplary) damages require misconduct beyond simple negligence, such as fraud, malice, or gross negligence, aiming to punish and deter extreme wrongdoing.
- Standard ISO policies are primarily designed for compensatory damages, and insurance coverage for punitive awards varies by state public policy and specific policy endorsements.
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