Damages

What are damages?

In law, damages are a form of compensation for injury or loss. When one person commits some wrongdoing against another person, the wrongdoer may have to pay damages to the wronged person.

Damages apply when a court has determined that a wrongdoing party owes something to the party they harmed. The court will order the wrongdoer to compensate the affected party for their loss—that compensation is known as damages.

Or, more specifically, they’re compensatory damages; we’ll get more into the different types of damages in the next section.

The main idea behind damages is that someone who’s suffered an injury or loss should be returned to the financial position they were in before the loss.

For example: if someone is injured in a car accident that wasn’t their fault, they shouldn’t suffer any monetary loss as a result. Their medical and rehabilitation costs, their lost wages, the damage to their car… the person who caused the accident (or their liability insurance) should have to pay for these.

Once the law has determined that person’s fault in the accident, they’ll be ordered to pay damages to the victim.

Many lawsuits result in one party paying damages to another—it’s not just vehicle accidents.

In this example, Soumya receives two forms of damages:

• pecuniary damages, for the financial losses she experienced (loss of income, rehabilitation bills, etc.)
• non-pecuniary damages, for the losses she experienced that aren’t monetary (pain and suffering, emotional trauma, etc.)

Even though non-pecuniary damages aren’t repaying a financial loss, they’re still compensatory. They are still compensating the wronged party for their experiences.

That’s how compensatory damages work. Let’s look at a few other types before we talk about damages and insurance.

Types of damages

We’ve covered compensatory damages, which are the most common type that average people are likely to run into. However, a court may assess other types of damages depending on the situation:

• Punitive damages. Also known as exemplary damages. These are damages awarded not to compensate a victim, but to punish a wrongdoer. Punitive damages are usually only awarded in cases where a wrongdoer acted intentionally in harming the victim, or was exceptionally negligent.
• Aggravated damages are like compensatory damages, in that they are intended to compensate a victim, not punish a wrongdoer. However, aggravated damages are most common in contract law cases. They may apply if the wronged party suffered losses beyond just a breach of contract—particularly if the wrongdoing party was acting in bad faith or being malicious.
• Nominal damages. These are awarded in cases where there was a wrongdoing but it wasn’t particularly severe, or there is insufficient evidence to assess compensatory damages. Nominal damages are meant to acknowledge that one party did commit some wrong, but the victim may not have experienced any demonstrable loss or injury.
• Liquidated damages can be part of a contract between two parties. If one party breaches the contract in some way, they may have to pay liquidated damages to the other party. Liquidated damages are agreed upon in advance and are part of the existing contract.

There are, of course, many forms of damages depending on the situation. Though, most people won’t have to be on the giving or receiving end of damages too often in their life.

Now, if you do find yourself ordered to pay damages, where does insurance come into the picture?

Damages and insurance

Ideally, you’ll never have to pay damages to anyone—but accidents happen.

Depending on the situation, you can often turn to your home or auto insurance policy to cover compensatory damages for which you’re liable. Both home and auto insurance policies include liability coverage.

In home insurance, liability coverage includes both personal liability and premises liability protection:

• Personal liability coverage will help you cover damages and legal costs if you’re found liable for something based on your actions.
• Premises liability coverage does the same, but when you’re found liable because of your responsibilities as the occupier of a residence.

Everyone is responsible for making their home reasonably safe for visitors. Look at the previous section’s slip-and-fall example: Jeremy, the homeowner, had a responsibility to de-ice his walkways. Since he didn’t, he was found to be negligent, and ordered to pay damages. His home insurance policy may have responded to help cover those damages.

Liability insurance protects against many damages for which the policyholder is found liable. However, it’s important to remember that it only covers compensatory damages. Insurance won’t cover punitive or aggravated damages.

Additionally, liability insurance under a home insurance policy also does not cover any liability assumed under contract, unless it would have applied (and been covered) even if the contract did not exist. People who routinely accept contractual liability—like home business owners—should ensure they purchase appropriate protection, either as an addition to their home insurance policy or elsewhere.

To learn more, visit our article about liability insurance.

The important points

• Damages are monetary compensation for injury or loss, paid from the wrongdoing party to the wronged party.
• Most damages in civil cases are compensatory damages, but there are other forms, such as punitive damages.
• Liability insurance may compensatory damages for which the insured is liable.

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.