Punitive damages are also called exemplary damages. They are awarded both to deter the defendant and others from conduct similar to the conduct that gave rise to the lawsuit, and to punish the defendant. They are often awarded to set a public example. Punitive damages are awarded infrequently, but they may be appropriate in many situations where compensatory damages would be inadequate to the situation because the defendant acted in a truly egregious fashion. Some states have enacted a split-recovery statute in which a portion of the punitive damages award goes to the state, not the plaintiff.
Generally, punitive damages are in excess of provable injuries. They are usually only awarded in cases brought under tort law, such as personal injury or medical malpractice cases, rather than those brought because of a contractual dispute. However, in some cases, punitive damages are awarded in insurance bad faith cases that arise under an insurance policy. This is because in some instances the insurer's breach of contract is so wrongful that it breaches the implied covenant of good faith and fair dealing, a tort.
The amount of punitive damages is left to the jury's discretion. In most states, the jury is instructed to consider both objective and subjective factors. These factors include the reprehensibility of the defendant's misconduct, the amount of punitive damages that would deter the defendant based on the defendant's wealth, and the nature of the plaintiff's injury. Defendants often ask that the jury be instructed to consider the reasonable relationship between the punitive damages and the plaintiff's injury.
Some proponents of tort reform believe that punitive damages should be limited to those instances involving actual malice. However, in most states, punitive damages are awarded when a defendant's actions are willful, malicious, oppressive, fraudulent, or reckless. For example, punitive damages may be awarded in a product liability case when the defendant is a corporate drug manufacturer that knowingly sells drugs that have permanent harmful side effects without issuing a warning. Punitive damages have also been awarded in cases when a religious institution has been aware of a clergyman sexually molesting children and shuffled the clergyman to another parish without warning parishioners.
Punitive damages might also be appropriate in a premises liability case when an apartment complex knows that the gate to an otherwise unguarded swimming pool is broken, but fails to fix it even though it is aware of numerous toddlers in the complex. Similarly, punitive damages might be appropriate when someone with three prior DUI convictions drives drunk on a suspended license and kills another person.
When evaluating compensatory damages, a defendant's financial condition is inadmissible. In contrast, with regard to punitive damages, the jury is supposed to consider a defendant's wealth or financial condition in evaluating the appropriate amount that should be awarded. Wealthy or corporate wrongdoers typically face higher punitive damages awards than less wealthy defendants because it will take more to deter them from similar conduct in the future.
In many states, there are limits on the size of the punitive damages award. In California, for example, some courts have limited punitive damages so that they do not exceed 10% of a defendant's net worth. In other states, punitive damages awards must bear a reasonable relationship to the compensatory damages. They may not be more than two or three times the amount of compensatory damages.
The United States Supreme Court has found that punitive damages that are four times the amount of compensatory damages are close to excessive but are still constitutional. However, the Court has struck down a punitive damages award in which the ratio of punitive damages to compensatory damages was 145:1, on the grounds that it violated the Due Process Clause of the Fourteenth Amendment. The Court suggested that it would be rare for a jury to be justified in awarding a ratio of damages higher than a single digit between punitive and compensatory damages.
