Which of the following best describes 'compensatory damages'?

Compensatory damages are specifically designed to reimburse a party for actual losses incurred due to another party's actions or negligence. This form of damages aims to restore the injured party to the position they would have been in had the harm not occurred, encompassing both direct and consequential losses. This includes not only tangible losses, such as medical expenses or property damage, but also intangibles like lost wages, as long as they can be substantiated.

The other options focus on different aspects of damages or settlements. Payments for mental anguish alone represent a form of damages but do not encompass the broader range of actual losses. Monetary awards intended to deter future misconduct pertain to punitive damages, which serve a different purpose by punishing the wrongdoer rather than compensating the victim. Lastly, settlements out of court may involve a variety of payments but do not specifically describe compensatory damages, as they can include both compensatory and non-compensatory elements.