What is legal damage? Are they taxable? What types of damages are hard to recover? Learn about what its legal definition means and more, including the different types of legal damages.

Let’s start by reading our FAQs resource to learn more about legal damages in detail today!

What is a Legal Damage?

When an individual, group, organization, or entity has suffered harm due to another party’s negligence or actions, intentional or otherwise, the former is eligible to receive compensation in the form of legal damage. Legal damage refers to a monetary or financial remedy given to a party who has suffered damages to provide relief and restore the prior status had the harm not been caused.

Legal damages are integral in lawsuits resulting in loss, such as personal injury claims, medical negligence, employment disputes, intellectual property infringement, contract breaches, etc. Legal damages aim to make the injured party not suffer the impact of damage in their day-to-day life and functioning.

The specifics of how legal damages are handled, and compensations awarded vary from one jurisdiction to another.

What are the Types of Legal Damages?

In the US Legal system, there are many types of legal damages. The particular type determines the nature and amount of compensation provided. Let’s take a look at some of the various legal damages.

  • Compensatory Damages
  • Punitive Damages
  • Liquidated Damages
  • Nominal Damages
  • Incidental Damages

Damages legal definition

Compensatory Damages

Compensatory Damages are intended to compensate the plaintiff or injured party for their losses and harm. Compensatory damages aim to provide financial relief to the injured party to help put them in the position they’d be in had the harm not occurred.

Compensatory damages can be divided into:

  • Economic/Special Damages: These are quantifiable financial losses incurred by the injured party. Economic damages can be paid for medical bills, losing the ability to earn wages and self-sustain, damage to one’s health or property, rehabilitation costs, etc. Any money awarded for direct financial loss in a tort case falls under economic compensatory damages.
  • Non-Economic/General Damages: Conversely, general damages cover non-economic losses that aren’t easy to quantify monetarily. The damages that fall under non-economic damages are emotional distress, pain and suffering, reputation loss, and loss of consortium, among others. Intangible losses fall under general damages.

Punitive Damages

Punitive damages compensate the victim and go one step further to punish the defendant for their wrongful behavior. Punitive damages are found in fraud and tort cases where the defendant’s behavior is deemed malicious, intentional, or grossly negligent.

They serve as a means to deter the punished defendant from repeating the same behavior in the future and make an example of them, which can discourage others from doing the same.

Liquidated Damages

Liquidated Damages are common in lawsuits involving contract breaches. When a party refuses to abide by a contract, the pre-determined set of contractual conditions will come into play as means of compensation.

This breach can be a failure to perform a duty or unwillingness to comply, and the contract usually has clauses and conditions to address the damage in place.

Nominal Damages

Nominal Damages is a small amount of money awarded when the plaintiff’s legal right has been violated, yet no significant harm, damage, or pain and suffering occurred. The nominal damages acknowledge this by typically awarding $1 in damages as an affirmation of the plaintiff’s rights.

Incidental Damages

In addition to compensatory damages, a plaintiff can also claim incidental damages. This refers to any expenditure the injured party has had to provide to reduce the harm or damage caused. Incidental damages are commonly seen in lawsuits where the dispute is over a breach of contract regarding the delivering goods and supplies.

An example of an incidental damage case is between a buyer and a seller, where the seller (plaintiff) incurred additional expenses due to having to hold or cancel a delivery already in transport.

What are Legal Damages in Tort?

In tort lawsuits, legal damages are the financial harm suffered by the victim. To compensate the victims for the damages they have suffered, they can be awarded what is known as compensatory damages.

Additionally, courts can give punitive damages to the plaintiff to act as a punishment to the defendant. Tort lawsuits arise when the defendant’s behavior has resulted in injuries and damages for the plaintiff.

The defendant’s actions that caused this may be intentional, malicious, or negligent; in some cases, it can also be an unwillingness to perform their duties, resulting in damage.

In tort cases where the court seeks to punish the defendant’s behavior, punitive damages are intended to discourage the defendant from repeating the misconduct in the future.

Special Damages vs. General Damage

Special damages are quantifiable losses such as lost wages, damage to property, medical bills, and other expenditures. In contrast, general damages are those losses that are intangible and difficult to quantify.

These include emotional distress, pain and suffering, loss of reputation, loss of consortium, mental harassment, and more. Special damages are easier to prove than general damages.

It is more straightforward of an argument for attorneys to show the total amount of a plaintiff’s expenses resulting from a tort than to argue and justify how much intangibles like pain and suffering are worth.

What is the Burden of Proof in a Damages Claim?

In lawsuits where the plaintiff seeks to claim compensation for legal damages, the burden of proof falls on the plaintiff. The standard of proof in such cases is known as the “preponderance of the evidence” standard.
By this, the plaintiff must prove that the defendant’s actions caused damages, loss, or pain and suffering. Attorneys meet the burden of proof by presenting evidence, testimony, depositions, records, etc.

Are Legal Damages Taxable?

The taxability of legal damages depends on the jurisdiction, nature of the lawsuit, and type of damage. According to Internal Revenue Code (IRC), compensatory damages due to personal injury, sickness, or inability to self-function are generally taxable. On the other hand, general damages and punitive damages are all taxable.

Further, if there’s interest applied to the damages awarded, this profit would also be taxable.

What Type of Damages is Not Recoverable?

Legal principles, public policy considerations, or statutory provisions can influence the limitations in claiming legal damages. Some of the damages that are usually not able to be recovered include:

  1. Damages that are based on speculations, hypotheses, unlikely events, and uncertain conditions in the future
  2. Unnatural or unforeseeable damages where the defendant is not directly involved or had no control over preventing.
  3. Indirect damages aren’t a result of the direct actions of a defendant.
  4. Punitive Damages in certain jurisdictions.
  5. Recovering attorney’s fees (depending on the type of lawsuit, it can be rare to expect).

How are Compensatory Damages Calculated?

The exact method of calculating the legal damages in various lawsuits depends on the type (economic or non-economic damages), the court, the jurisdiction, and the severity of the defendant’s actions.

Economic Damages (financial loss from Compensatory Damages are usually resolved by adding the economic and non-economic bills and all expenses caused due to the harm of the tort incident. In some cases, any future expenses may also be considered while awarding the compensation.

How do You Calculate Damages for Emotional Distress?

Emotional distress, or general damages, typically are difficult to quantify and thus require special methods for computation. Attorneys rely on two standard methods in these instances to calculate damages for emotional distress, which include the following:

  1. Multiplier Method
  2. Per Diem Method

Multiplier Method: In this method, the medical bills, expenses, receipts, and more are added up and multiplied by a value ranging from 1.5 to 5. This can vary depending on the severity of the pain and suffering the plaintiff had to undergo. The total compensation awarded will be this multiplied value.

Per Diem Method: This method opts for awarding compensation on a daily computation. A per diem value is assigned for a day, depending on the severity of the plaintiff’s emotional distress.

For example, if the per diem rate is $200 and the plaintiff has suffered pain for 100 days, the emotional distress damages would amount to $20,000.

It is always advisable to consult an attorney to get a clear picture of the lawsuit, legal damages, and possible compensation, as these can vary from one county to another, one case to another.

Are There any Limits on the Amount of Damages that can be Awarded?

Yes, but it depends on state law, as some states do not have caps limiting the amount of damages awarded to plaintiffs (or certain types of damages, i.e., limits on punitive damages). Laws limiting damages are put in place to ensure the cost of doing business does not become cost prohibitive.

If excessive amounts are being awarded, it can lead to some services being harder to come by. For instance, Statutory Caps exist in some jurisdictions for certain types of damages, such as general damages in medical malpractice cases.

If it is relevant to the state where the case is being litigated, the limit on court-awarded damages is often for medical malpractice lawsuits and punitive damages lawsuits.

Similarly, sovereign immunity is a concept that allows some government organizations and entities to stay immune from liability for certain types of legal damages or restrict the amount given out as compensation.

Another limit is the Collateral Source Rule, which limits the amount of compensation a plaintiff can receive if they have gotten financial support from alternate sources, such as an insurance claim. Double compensation for the exact cause of action is prevented by this rule, thus.

The collateral source rule makes it possible for insurance companies to subrogate claims, which means after they pay out damages to the plaintiff, the insurance company can, in turn, sue another party to reclaim the funds already paid out.

What is the Cap on Punitive Damages in Texas?

According to the Texas Civil Practice and Remedies Code, the cap on punitive (exemplary) damages for lawsuits is generally set at the larger of the two:

Either $200,000 or two times the amount of economic damages (special), along with an additional amount for non-economic damages (general), up to a maximum of $750,000.

However, this is not all-inclusive, as exceptions exist on the cap in Texas if the court finds the defendant intentionally (knowingly) violated the law, was intoxicated, or acted with malice by knowingly causing harm to and damaging the plaintiff.

Written by Aaron R. Winston
Last Updated: May 31, 2023 7:10am CDT