Punitive or exemplary damages are awarded only in special cases to punish the defendant for his or her egregious or knowingly harmful conduct. Punitive damages are also awarded to deter both the defendant and others from engaging in similar bad conduct. Courts may also award exemplary damages to compensate the plaintiff in cases where an award of attorneys fees is not allowed by law.

Punitive damages generally cannot be awarded in a contract dispute. The primary exception is in insurance bad faith cases where there is a breach of the implied covenant of good faith and fair dealing by the insurance company. Punitive damages are most commonly awarded in tort cases involving fraud, breach of fiduciary duty and intentional conduct resulting in harm to another.