What Are Compensatory Damages?

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Compensatory damages are monetary awards granted to a plaintiff that are intended to compensate them for any loss or injury.

Key Takeaways

  • Compensatory damages compensate a party that has suffered harm or injury caused by another party.
  • Compensatory damages cannot exceed the actual cost of the harm or injury.
  • Courts award punitive damages to punish a party that intentionally or negligently caused harm or injury to another party.
  • In some cases, a court will award a plaintiff compensatory and punitive damages.

How Do Compensatory Damages Work?

A court awards compensatory damages when it rules that a defendant is liable for harm or injury to another party. Typically, compensatory damages awards are monetary compensation, in an amount the court deems sufficient to make the victimized party whole again. Courts calculate compensatory damages based on the amount of actual losses.

To receive compensatory damages, a plaintiff must prove they suffered harm, an injury, or some other type of loss. To calculate the award, the court considers factors such as incurred expenses, lost income, and the market value of damaged or destroyed property. A court can award compensatory damages for breach of contract or physical damages caused to a person or property.

Example of Compensatory Damages

For example, in 1989, the tanker Exxon Valdez struck a reef in Alaska’s Prince William Sound, resulting in an oil spill that caused widespread damage and destruction. The oil killed harbor seals, sea otters, and whales, along with hundreds of thousands of birds, including bald eagles. It also affected commercial fisheries, recreation areas and tourism, causing economic losses.

The Exxon Valdez oil spill prompted thousands of civil lawsuits, brought to court through a class-action lawsuit. The jury ruled for the plaintiffs, awarding them $287 million in compensatory damages.

In some cases, a court may award compensatory damages in an amount that exceeds the plaintiff’s request. A court may also limit a compensatory damages award if it considers the plaintiff responsible for part of the losses. Such was the case in the Liebeck v. McDonald's Restaurants ruling.

In the 1990s, an elderly woman named Stella Liebeck ordered a cup of coffee at the drive-through window of a McDonald’s restaurant. After the driver parked the car, Liebeck took the lid off the coffee cup and spilled the hot coffee on herself, causing third-degree burns to 16% of her body, rendering her disabled for more than two years. After initially spending eight days in the hospital, Liebeck suffered scarring, which required skin grafting.

Liebeck sued McDonald’s, and her attorney argued that the coffee was dangerously hot. In fact, her lawyer produced evidence that during the 10-year period leading up to Liebeck’s injury, over 700 people also suffered severe burns from McDonald’s coffee. The plaintiff prevailed and the jury awarded Liebeck $200,000 in compensatory damages. But they later reduced the amount to $160,000 because they believed she was 20% responsible for her injuries.

Compensatory Damages vs. Punitive Damages

Compensatory damages apply to actual monetary losses. For example, a person injured due to another person’s neglect might sue the wrongdoer for the cost of medical bills and lost wages. On the other hand, courts award punitive damages as punishment. Typically, a court grants this type of award when it finds that the defendant willfully caused harm or engaged in willful misconduct.

For instance, in the Exxon Valdez case, the jury awarded the plaintiffs $5 billion in punitive damages. On appeal, the court reduced that award to $507.5 million. In the McDonald’s case, the jury awarded Ms. Liebeck punitive damages of $2.7 million, before the judge reduced the award to $480,000.

Compensatory awards require the plaintiff to prove they suffered harm or injury. To receive punitive damages, the plaintiff must prove that the wrongdoer acted intentionally or in a willfully negligent manner. According to Cornell Law School, courts award punitive damages in just 5% of civil cases.


Limits on punitive damages vary by state. For example, Florida law caps punitive damages awards at three times the compensatory damages award or $500,000. Oklahoma limits punitive damages awards to the same amount as the compensatory damages award or $100,000. However, some states, including California, do not limit punitive damages awards.

Compensatory Damages Punitive Damages
Awarded to compensate a plaintiff for actual losses Awarded to punish a defendant for negligence or intentional harm
Defendant must prove they suffered harm or injury Defendant must prove they suffered harm due to intentional wrongdoing or willful negligence
Awards limited to actual damages Award limits vary by state
Subject to reduction by the trial judge or on appeal Subject to reduction by the trial judge or on appeal

Alternatives to Compensatory Damages

In certain cases, litigants decide to avoid the cost of a trial and settle out of court. When parties choose a settlement, they dismiss the litigation and come to an agreement privately. Terms of settlements vary and, depending on the type of dispute, may or may not involve payments.

In the McDonald’s hot coffee case, Liebeck’s legal team offered to settle the matter for $20,000, but the company refused. The plaintiff prevailed and McDonald’s had to pay a combined $640,000 in compensatory and punitive damages.


In many cases, judgments and settlements are taxable. Judgments and settlements received for physical injuries, physical illnesses, and some discrimination claims are non-taxable.

Frequently Asked Questions (FAQs)

What are the two types of compensatory damages?

There are general damages, which cover losses that are direct and immediate consequences of a violation or breach of contract, and special, or consequential, damages that do not relate to breaches of contract.

What is the difference between compensatory and punitive damages?

Compensatory damages are usually awarded to compensate victims, while punitive damages are awarded to punish those with unlawful conduct and are usually additional to compensatory damages.

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  1. Cornell Law School Legal Information Institute. “Compensatory Damages.”

  2. Cornell Law School Legal Information Institute. “Damages.”

  3. U.S. Department of Justice. “U.S. v. Exxon Corp. et al.(D. Alaska).”

  4. Texas Trial Lawyers Association. “McDonald’s Hot Coffee Case - Read the Facts NOT the Fiction.”

  5. Cornell Law School Legal Information Institute. “Punitive Damages.”

  6. Florida Legislature. “The 2022 Florida Statutes.”

  7. Oklahoma Statutes. “Punitive Damages Awards by Jury.” Pages 4-5.

  8. Rose, Klein, & Marias Law Firm. “What Are Punitive Damages?

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