A more thorough explanation:

In tort law, compensatory damages are awarded by a court to compensate a party for the loss they suffered. This type of damages is also known as actual damages. If a party's right was violated but they did not suffer any harm or losses, the court may instead grant nominal damages.

The amount of compensatory damages awarded is based on the proven harm, loss, or injury suffered by the plaintiff. This award does not include punitive damages, which may be awarded when the defendant's actions are especially reckless or malicious. Receiving compensatory damages does not prevent a party from also receiving punitive damages.

When calculating compensatory damages, courts will often consider the fair market value of destroyed or damaged property, lost wages or income, and necessarily incurred expenses. Courts may also include damages for emotional distress, although it can be difficult to place an economic value on these intangible factors, so the application is inconsistent.

• If a driver runs a red light and hits another car, causing damage to the car and injuries to the driver, the injured driver may be awarded compensatory damages to cover the cost of repairing the car and any medical expenses incurred as a result of the accident.
• If a company breaches a contract with another company, causing the second company to lose profits, the second company may be awarded compensatory damages to cover the lost profits.

These examples illustrate how compensatory damages are awarded to compensate a party for the harm or loss they suffered as a result of another party's actions.