A Closer Look at Punitive Damages

Depending on what part of the country your clients live and work in, most states allow punitive damage insurance coverage. The issue of whether or not to insure punitive damages has been the source of some confusion and frustration. But before more confusion is added to the conversation, it’s best to get a better look at what punitive damages are and how they affect insured clients.

A Closer Look at Punitive Damages

Punitive damages are also called exemplary damages. These damages are awarded both to persuade the defendant and others from conduct similar to the conduct that brought out a lawsuit, and to punish the defendant. These damages are usually awarded to set an example of what courses of action not to take in a legal matter.

These damages are awarded on an infrequent basis, but they can be the right choice in many legal situations where compensatory damages would be an inadequate avenue to the situation because the defendant committed a truly egregious act.

Take product company Johnson & Johnson for example. The company, which makes such things as baby powder and soaps, faced a $750 million punitive damages verdict in a suit alleging its baby powder caused four people to develop mesothelioma. And while the company is currently fighting against the verdict, the damage it caused was seen egregious enough to bring a major lawsuit against them.

Proving Injuries

In general, punitive damages are given out when provable injuries are involved. They are typically only awarded in cases brought under a tort law, such as medical malpractice cases or personal injuries. But in some cases, these are awarded in insurance in bad faith cases that arise under a punitive damages insurance policy. This is because in some cases the insurer’s breach of contract is so controversial that it breached the implied covenant of good faith.

The amount awarded is usually left up to the jury. In most states, a jury is directed to take into account both objective and subjective factors, which include the defendant’s misconduct, the amount of punitive damages that would limit the defendant based on their wealth, and what kind of injury the plaintiff suffered.

Limits to Punitive Damages

A defendant’s financial situation is usually inadmissible when evaluating compensatory damages. On the other hand, the jury is expected to consider a defendant’s wealth or financial condition when evaluating the right amount that should be awarded. Like Johnson & Johnson, wealthy or corporate defendants usually face higher punitive damages awards than less wealthy individuals or companies.

Depending on the state you’re in, there can be limits on the amount of punitive damages awarded. For example, California sets a 10% cap on punitive damages, meaning that the damages awarded cannot exceed one-tenth of a defendant’s net worth. In some states, damages awards must have a reasonable relationship to the compensatory damages. They cannot be more than three times the amount of compensatory damages.

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