Punitive damages

Compensatory damages repay a plaintiff's actual loss. Punitive damages, also called exemplary damages, go further: they punish a defendant whose conduct was malicious, fraudulent or recklessly indifferent to others, and deter similar conduct. States set the standard of proof, often clear and convincing evidence, and some cap awards or send part of them to the state. The U.S. Supreme Court has also limited them under the Due Process Clause. In State Farm v. Campbell (2003), it said few awards exceeding a single-digit ratio to compensatory damages will satisfy due process.

Whether a liability policy may pay them is a matter of state public policy. Some states bar insuring punitive damages outright. Others allow it only when liability is vicarious, such as an employer held responsible for an employee's act, or when the conduct was gross negligence rather than intentional. Others allow it broadly. Policies add their own layer: an exclusion, a definition of damages that leaves them out, or most-favorable-jurisdiction wording that applies whichever state's law would permit coverage.

The common pitfall is assuming the lawsuit is covered end to end. An insurer can owe a defense while the punitive portion of a verdict is uninsured, leaving the business to pay it. Large awards are one reason liability costs have climbed, as the entries on social inflation and nuclear verdict describe. The guide on are fines, penalties and punitive damages insurable? covers the state-by-state picture.