Punitive Damages are damages awarded as a punishment to the wrong doer/defaulter. Its purpose is not to compensate the plaintiff. However, s/he may be entitled to all or a portion of the damages.
Courts may impose punitive damages if it feels that compensation damages are inadequate or to avoid under-compensation of plaintiffs. Punitive damages are mostly awarded in tort cases and not in cases over contractual obligations. However, if an independent tort is committed in a contractual setting, punitive damages can be awarded for the tort.
Laws regarding punitive damages vary from state to state. In most of the states, punitive damages are awarded if the tort was committed with the intent to harm and not caused by mere negligence. There is no limit to the amount that a party may be ordered to pay as punitive damages.
Damages for mental suffering are compensatory in nature. However, in cases challenging insult, indignity and similar issues, punitive damages may be ordered by courts.
In State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (U.S. 2003), respondent insureds sued petitioner insurer, alleging that the insurer’s refusal to settle meritorious claims against the insureds constituted bad faith, fraud, and intentional infliction of emotional distress. The insureds contended that the substantial punitive damages award was justified in view of the insurer’s national scheme to meet corporate fiscal goals by capping claim payments and engaging in fraudulent practices. The insurer argued that the ratio of punitive damages to compensatory damages clearly indicated that the punitive damages award was excessive and unrelated to the actual harm suffered by the insureds. The U.S. Supreme Court held that the punitive damages award was neither reasonable nor proportionate to the wrong committed, and it was thus an irrational, arbitrary, and unconstitutional deprivation of the property of the insurer. While deciding the case, the court held that “courts reviewing punitive damages must consider three guideposts: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.”