Since compensatory damages are supposed to fully reimburse the plaintiff for all losses suffered because of a tort or breach of contract, how can one justify the award of punitive damages?

Answer 1

Punitive damages are intended to punish the wrongdoer and make an example of him/her, and
to deter the wrongdoer as well as others from repeating the offensive conduct. However, critics point out that human nature being what it is, a greedy plaintiff (and sometimes avaricious counsel
as well!) may be more inclined to sue than to settle (e.g., by using alternative dispute resolution methods). The hope for punitive damages, thus, encourages litigation at considerable cost to society as well as the defendant. Society, after all, provides the forum (the court) in a costly courthouse.
Society also generally benefits from the continuing production by defendant companies (that provide products, services, and employment opportunities) which may be reduced or even eliminated by imposition of punitive damages as well as by the fear of costly litigation.
The possible salutary effect of a judgment as a punishment and example for others can still be realized by paying all or most of the awarded punitive damages to the state (as is routinely done
with fines imposed upon criminals for crimes they have committed). This is now done in some jurisdictions. It also helps to fund payment of compensatory damages to multiple plaintiffs, where otherwise one or a series of heavy punitive damage awards could bankrupt the defendant.