Compensatory Damages

Updated on April 4, 2024
Article byPeter Johnson
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Compensatory Damages Definition

Compensatory damages are monetary compensation that the suffering party receives to cover the costs incurred in the event of an injury or loss. A plaintiff can be awarded these substantial damages in civil lawsuits for several reasons, such as lost wages, medical expenses, or mental anguish.

Depending on the nature of the personal physical injury, a party can claim either special or general compensatory damages. However, the only requirement is that the plaintiff needs to prove the damage it suffered. These should not be confused with punitive damages, which punish the party that committed the negligent or unlawful act.

Key Takeaways

  • Compensatory damages are monetary damages received by the plaintiff in the event of injury or loss to cover the expenses that occurred during the event.
  • There are two primary types of substantial damages, including actual and general. Actual damages repay the plaintiff a specific amount, whereas general damages cover the estimated loss.
  • A compensatory damages example may include medical fees, loss of income, and physical pain and suffering.
  • These are different from punitive damages in that the former compensates the plaintiff, and the latter punishes the defendant.


When an injury occurs from an accident, the injured individual may or may not be eligible for compensation depending on the circumstances. Since each case is unique, the facts provided and the events leading to injury or loss determine the outcome. Under the review of the case, the plaintiff or the injured party will, in some cases, receive “damages” based on the injuries or losses that they suffered.

So, the answer to the question what is compensatory damages is the money received as compensation from the defendant following a lawsuit. The funds will usually cover the cost of hiring an attorney and additional payment for any losses or injuries sustained.

Compared to other types of damages, substantial damages “compensate” the injured party for the expenses the party is responsible for paying, such as medical expenses.

Types of Compensatory Damages

There are two types of compensatory damages having separate definitions and ways to assist the receiving party, including:

  1. Special or Actual, and
  2. General

#1 – Special or Actual Damages

  • Actual damages provide the plaintiff with enough compensation to cover only the amount of money they lost in the accident.
  • These damages are easier to prove the monetary worth of the damage that can be compensated accordingly.
  • In the court case Birdsall v. Coolidge, the US Supreme Court noted that the compensation for actual damages should “…commensurate with the injury’s suffered, neither more nor less…”

#2 – General Damages

  • On the other hand, general damages will compensate the plaintiff with an estimated loss incurred due to the defendant’s actions.
  • It can cover many other losses or circumstances that are not easy to assign a monetary value to, such as emotional trauma, and can even include future lost wages.
  • Compared to actual damages, general damages can cover more expenses, even those hard to prove their monetary worth.


There are several examples of actual and general compensatory damages, including:

#1 – Actual Damages

  • Medical expenses for treatment
  • Loss of income
  • Legal fees
  • Business expenses
  • Rehabilitation expenses
  • Property replacement
  • Transportation
  • Prescription drug cost
  • An increase in living expenses

Remember, one may need documentation to prove the costs incurred with these types of damages.

#2 – General Damages

  • Physical pain and suffering
  • Loss of consortium (loss of companionship)
  • Inconvenience
  • Mental anguish (Mental suffering from the event, such as anxiety, trauma.)
  • Decreased quality of life

General damages are awarded based on the unique circumstances surrounding the event. In most cases, these compensate for pain and suffering, the cost of which is difficult to estimate.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Compensatory Damages vs Punitive Damages

Punitive damages are another common type of damages awarded to plaintiffs for various reasons. The distinct difference between these and compensatory damages is the intention behind the case – to punish the defendant and compensate the plaintiff. Read on to learn what they involve and how they compare to substantial damages.

  • While compensatory damages repay an individual for losses, punitive damages aim to punish the defendant for extreme recklessness.
  • Punitive damages are considered a punishment to the defendant to prevent the act from happening again. Substantial damages do justice and provide benefit to the sufferer.
  • Punitive damages can include negligent acts from the defendant, such as drunk or distracted driving, medical malpractice, or product liability. Compensatory damages compensate the plaintiff for the actual losses due to injuries and damages.
  • Compared to substantial damages, punitive damages are less common in practice. As such, they require the defendant to be highly negligent. An example of extreme negligence could include medical malpractice where the doctor did not perform the correct procedure even though it is an ordinary practice.

Are Compensatory Damages Taxable?

Punitive damages are usually taxable, but substantial damages are a little more complex to determine whether they are taxable. The taxability of the damages will depend on the circumstances of receiving them.

Compensatory Damages

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Compensatory Damages (

#1 – Personal Injuries

According to information on the IRS website, compensatory damages received for personal physical injuries are a non-taxable form of income. However, it also mentions it will depend upon the terminology used. For example, if someone incurs medical expenses but has been treated for those conditions previously, taxes may be applicable in this situation.

#2 – Mental Anguish

Mental anguish can be treated as personal injuries when it comes to being taxable income or not. If the plaintiff had prior medical records showing the mental condition, they would have to pay taxes for it. However, if the conditions are non-visible like emotional distress, the damages may be subject to being considered a form of taxable income and treated as such.

#3 – Product Liability

Since many product liability cases involve personal or mental injury, they are subject to the same tax rules as previously mentioned. The taxable benefit will be determined by whether the disorders have been already diagnosed or are apparent.

This has been a guide to What is Compensatory Damages & its Definition. Here we discuss a list of compensatory damages and how they are taxable? You may also have a look at the following articles