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What are Compensatory Damages in Liability Insurance?

May 31, 2024


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What are Compensatory Damages in Liability Insurance?

What are Compensatory Damages? - Definition

Compensatory Damages are the financial compensation that the Insured pays to the victim who was harmed as a result of the Insured’s actions. Compensatory Damages are awarded by a Civil Court when a negligence of one party has harmed another.

How do Compensatory Damages work?

Every organization owes a duty of care to regulate its behaviour in such a manner so as not to cause injury or property damage to other person. If a Third-Party suffers a Bodily Injury or Property Damage because of negligence, the victim can take the negligent person to court. If the court finds the organization legally liable, it can award compensatory damages to the victim. The intention of awarding Compensatory Damages is to make the victim whole again. The onus of proving that the Defendant was negligent which led to a Bodily Injury or Property Damage lies on the victim himself.

Types of Compensatory Damages

Compensatory Damages are of 2 types:

  1. Actual Compensatory Damages intend to provide monetary compensation for actual losses or damages. Examples of Actual Compensatory Damages include Actual Loss of Earnings as a result of injury, medical expenses incurred as a result of Injury and Funeral Expenses.
  2. General Compensatory Damages do not involve actual monetary losses. Examples of General Compensatory Damages include Pain, Suffering, Distress, Mental Anguish, Loss of enjoyment of life and loss of amenities etc. Liability Insurance Policies provide coverage for the legal liability of the Insured to compensate the Third Party for any losses suffered by the Third Party as a consequence of the Insured’s Actions.

Example of Compensatory Damages

A person had visited a Coffee shop where a server accidentally spilled hot coffee on the person. The Person suffered severe burns and sued the coffee shop owner in court. The Court awarded Rs2 lakhs in Compensatory Damages.

Compensatory Damages vs Punitive Damages

Courts award Compensatory Damages for actual losses suffered by the victims while Punitive Damages are typically awarded as a punishment to the wrongdoer. Courts usually award Punitive Damages when it finds that the person has willfully conducted harm or has shown disregard for safety conditions. Punitive Damages are also called Exemplary Damages. Compensatory Damages require that the Plaintiff suffered Bodily Injury or Property Damage while Punitive Damages require the Plaintiff to prove that the Wrongdoer acted in a wilfully negligent manner. Compensatory Damages are covered by Liability Insurance Policies while Insurance Coverage is typically not available for Punitive Damages.


When a victim sues you, the Defence Costs and Compensatory Damages can run to lakhs of rupees. These costs can cause a huge financial setback. Liability Insurance can protect you against such costs by providing coverage for Legal Costs and Compensatory Damages. Thus, every business owner should secure himself from various liability exposures with appropriate Insurances such as Commercial General Liability Insurance Policy, D&O Insurance Policy etc. If you need any assistance for Liability Insurance Policies, you can reach out to us at insurance@qian.co.in or call us on 022-35134695. We would be glad to assist you.