Compensatory Damages

1. General Principles
   A. Value
   B. Certainty
   C. Taxes, Interest, and Insurance
   D. Caps on Damages
2. Types of Compensatory Damages
   A. Efforts Made to Avoid Harm
   B. Lost Wages
   C. Pain and Suffering
   D. Hedonic Damages
   E. Contingency fees
3. Limits to Compensatory Damages
   A. Avoidable Consequences
   B. Benefit to Plaintiff Resulting from Defendant's Harm
   C. Remittur
   D. Collateral source rule
   
   1. General Principles
   A. Value
   
   The "fundamental principle" of compensatory damages "is to restore the injured party, as nearly as possible, to the position he would have been had it not been for the wrong of the other party." (US v Hatahley). The injured party's ex ante position is measured in terms of "value." Information up to the time of trial can be introduced as to the plaintiff's future. (so that, for example, a plaintiff who would have otherwise died after the injury being litigated would recover reduced damages for lost wages).
   
   (1) As used in this Chapter, value means exchange value or the value to
   the owner if this is greater than the exchange value.
   (2) The exchange value of property or services is the amount of money for which the subject matter could be exchanged or procured if there is a market continually resorted to by traders, or if no market exists, the amount that could be obtained in the usual course of finding a purchaser or hirer of similar property or services. The rental value of property is the exchange value of the use of the property.
   ...
   Comment e: Peculiar value to the owner. The phrase "value to the owner" denotes the existence of factors apart from those entering into exchange value that cause the article to be more desirable to the owner than to others.
   (Rest 2d Torts 911)
   
   B. Certainty
   
   Compensatory damages must also be certain to be awarded:
   
   One to whom another has tortiously caused harm is entitled to compensatory damages for the harm if, but only if, he establishes by proof the extent of the harm and the amount of money representing adequate compensation with as much certainty as the nature of the tort and the circumstances permit.
   ...
   Comment f: Interference with a gift or chance for gain. If a person can prove that but for the tortious interference of another, he would have received a gift or a specific profit from a transaction, he is entitled to full damages for the loss that has thus been caused to him. (See Illustration 15). On the other hand, in many cases it is impossible for this to be proved with any certainty, as when a person is in a class of beneficiaries, one of whom would have received a gift but for the wrongful conduct and there is no evidence to indicate which one would have been the recipient. In these cases the injured person, in order to recover, has the burden of proving that the gift would have been made to one of the class; having satisfied this burden, he is then entitled to receive an amount commensurate for the chance that he had of receiving the gift.
   
   (Rest 2d Torts 912)
   
   C. Taxes, Interest, and Insurance
   
   Compensatory damages are not taxable. Internal Revenue Code 104(a)(2). (The interest gained on discounted damages, however, would of course be taxable under normal rules.) The "tax-benefit" rule does tax damages to the extent that they have already been deducted from a person's tax payment, for example for health expenses. Compensatory damages can also sometimes be deducted as legal fees incurred in the cost of doing business. However, punitive damages are taxable, see O'Gilvie v. U.S., 519 U.S. 79 (1996).
   
   The common law did not allow prejudgment interest from damages. However, some state statutes do allow the calculation of prejudgment interest, often dependent on the defendant's "good faith" participation in settlement negotiations. See Farnsworth pp. 552-3. Post-judgment interest is usually available in all cases.
   
   Insurance companies often have divergent interests from the defendants they represent: for example, an insurance company with a policy cap of $25K representing a defendant sued for $50K would be more willing than the defendant himself to go to trial, because any risked damages in excess of the policy cap would be paid by the defendant. As a result, insurers are held to have a general duty to act "in good faith," and can be subject to an action for "bad faith" by its clients.
   
   In many areas, a large number of potential tortfeasors don't carry insurance and are otherwise judgment-proof. A "no-fault" system could compensate for the dead-weight loss by levying "insurance" through taxes, for example on gas for uninsured car drivers.
   
   D. Caps on Damages
   
   Some jurisdictions limit damages by statute. Undercompensated plaintiffs can also argue that their lost damages constitute a "taking" under the Fifth Amendment, with varying degrees of success.
   
   
   2. Types of Compensatory Damages
   
   A. Efforts made to Avert Harm
   
   (1) One whose legally protected interests have been endangered by the tortious conduct of another is entitled to recover for expenditures reasonably made or harm suffered in a reasonable effort to avert the harm threatened.
   (2) One who has already suffered injury by the tort of another is entitled to recover for expenditures reasonably made or harm suffered in a reasonable effort to avert further harm.
   (Rest 2d Torts 919)
   
   B. Lost Wages
   
   Plaintiffs can recover for the wages they would have earned if not for the injury suffered. Many actions to recover lost wage damages are made as a wrongful death claim, and are thus controlled by the wrongful-death statute of the jurisdiction.
   
   Spouses can recover for the value of domestic services provided by deceased spouses, see Haddigan v Harkins. Furthermore, the majority rule is that "the surviving spouse's remarriage ... does not affect the damages recoverable in an action for the wrongful death of the deceased spouse." Benwell v Dean
   
   Damages for lost future wages are discounted so that the plaintiff receives an amount that, if reasonably invested, will lead to the correct total amount at the time the plaintiff's wages would end. If the plaintiff received the entire amount of expected future wages, he could invest that amount and thus gain more than he would have originally received but for the accident. However, the proper discount rate can be difficult to determine, especially in light of inflation, see [OShea v Riverway Towing Co] (Farnsworth p. 531). The jury may also use other factors, such as the deceased's smoking, to reduce lost wages damages, see Landers v Ghosh.
   
   Economists argue that the opportunity costs of a person's activity should also be taken into account when calculating lost wages damages. For example, if a lawyer earning $100K/year quits her job to care for her children, her decision shows that she values the opportunity to take care of her children more the $100K/year her job provides. Thus, if she was killed, an opportunity-cost measurement would award her survivors damages equivalent to $100K/year.
   
   C. Pain and Suffering
   
   Plaintiffs can recover damages for physical pain suffered as a result of their injuries. However, damages for pain may be reduced when the plaintiff has a pre-existing condition, or where the injury complained of is unlikely to change the plaintiff's emotional state. Compare Olin Corp. v. Smith ($5.58M for amputated leg caused by hunting injuries) with Williams v. U.S. ($500K for amputated leg suffered by diabetic prison inmate). The plaintiff can also recover for "pre-impact fright" suffered in anticipation of injury, see Beynon v. Montgomery Cablevision (Farnsworth pp. 558-60).
   
   The plaintiff can also recover for social or personal humiliation suffered, that is, for "a feeling of degredation or inferiority or a feeling that other people will regard with aversion or dislike." Rest 2d Torts 508.
   
   Pain and suffering damages conflict with economic theories of tort as fufilling ex ante hypothetical bargains. First, potential victims or potential tortfeasors do not take out insurance against pain and suffering. (Insurance companies would be hesitant to offer pain-and-suffering insurance anyway because of potential moral hazard.) Second, nonpecuniary losses such as pain are hard to measure against pecuniary losses. Third, psychological studies show that a person's happiness a year after an accident is best predicted by their happiness before the accident.
   
   D. Hedonic Damages
   E. Contingency fees
   
   American law has been highly hostile to contingency fees over 50 percent, construing it as a means to sell one's claim. Contingency fees were completely barred in Commonwealth law. Contingency fees are also prohibited in divorce cases.
   
   The US does not award attorney's fees as part of damages, see Arcambel v Wiseman, whereas the Commonwealth typically has; however, under the Coase Theorem, the results of the two systems should depend only on the transaction costs incurred by trial. However, the trial itself can generate very high transaction costs barring negotation: for example, offering to bargain from the British to the American fee-shifting rule could be seen as a sign of weakness.
   
   Fee shifting and contingency fees are mutually exclusive in legal systems around the world.
   
   3. Limits to Compensatory Damages
   
   A. Avoidable Consequences
   
   (1) Except as stated in Subsection (2), one injured by the tort of another is not entitled to recover damages for any harm that he could have avoided by the use of reasonable effort or expenditure after the commission of the tort.
   (2) One is not prevented from recovering damages for a particular harm resulting from a tort if the tortfeasor intended the harm or was aware of it and was recklessly disregardful of it, unless the injured person with knowledge of the danger of the harm intentionally or heedlessly failed to protect his own interests.
   (Rest 2d Torts 919)
   
   B. Benefit to Plaintiff Resulting from Defendant's Harm
   
   When the defendant's tortious conduct has caused harm to the plaintiff or to his property and in so doing has conferred a special benefit to the interest of the plaintiff that was harmed, the value of the benefit conferred is considered in mitigation of damages, to the extent that this is equitable.
   Comment A: The rule stated in this Section normally requires that the damages allowable for an interference with a particular interest be diminished by the amount to which the same interest has been benefited by the defendant's tortious conduct...
   Comment B: Limitation to Same Interest. Damages resulting from an invasion of one interest are not diminished by showing that another interest has been benefited.
   Comment C: Benefits common to the community. Although ordinarily the damages for harming land are measured by the difference in its value before and after the tort, it would be unjust to apply this measure of recovery when the tortious conduct increases values in the vicinity generally and at the same time causes special harm to the plaintiff. Therefore, the rule stated in this Section is limited to situations in which the tortious act has conferred a benefit in which the public generally does not share.
   Comment D: Causation. Under the rule stated in this Section to justify a diminution of damages the benefit must result from the tortious conduct.
   
   (Rest 2d Torts 920)
   
   C. Remittur
   D. Collateral source rule
   
   Income received from a secondary source, such as first-party insurance, will reduce a plaintiff's damages under the collateral source rule. One justification of the collateral source rule is to reduce moral hazard. Second, the insurance company can itself recover the amount of damages reduced by the rule, thus reducing insurance premiums in an ex ante hypothetical bargain. One exception to the rule is income from life insurance policies, which helps deter potential tortfeasors against killing insure persons, and which carries less risk of moral hazard. (An exception to the life insurance exception is victim compensation schemes, such as for 9/11 victims, that are graded between individuals based off their lost income; the scheme reduced its payout by the deceased's life insurance policy.)