Economic Losses

Economic losses for a Company or an Individual

The goal of the financial expert who calculates economic loss is to determine the amount of money that will make an injured party whole. We seek answers to the questions "What would life have been like economically for the plaintiff had the event not occurred?" and "What do we expect life to be like now?"

The financial expert presents monetary valuations of economic loss that can assist the trier of fact in awarding damages, in the event the defendant is found liable. We do not presume liability. We do not quantify punitive damages. We do not usually price the loss of enjoyment of life (hedonic damages) or the loss of consortium (companionship). Instead, we focus on losses that can be calculated directly, broadly classified under the term economic damages or pecuniary damages.

We calculate the losses that you may have suffered due to the actions of the Defendant(s) based on your normal financial situation BUT FOR the economic damage caused upon you by the Defendant(s).

Procedurally, we first determine the various components of loss and summarize their costs in current dollars. Losses incurred prior to the scheduled date of trial are summarized and possibly accumulated with interest until the trial date. Next, we use projection factors to calculate probable future losses, considering such ingredients as health care inflation and wage growth - which impact the amount of loss, and probabilities such as surviving past a certain age or remaining in the workforce - which impact the likelihood of loss. Finally, we apply interest discount factors to those very same projected loss components, to determine the present value of future economic losses as of the trial date.

Components of Loss

The economic losses in a case might include any of the following components:

  • lost income;
  • extra costs to mitigate damages
    • payroll
    • other supporting expenses
    • replacement of materials or supplies
    • extra rental expense to continue operations

For an individual loss, we calculate:

  • the value of household services the plaintiff can no longer perform; and
  • the cost of medical treatments, special living accommodations, and possibly burial expenses.

Lost Income.

Lost income is a significant component of most business economic loss cases, personal injury, wrongful death, and wrongful termination cases. In most cases, determining wages is straightforward. Look at the plaintiff?s W-2 form, tax return, or pay stubs, and there is your answer. Other times, there are no readily defined wages, such as in the case of a business owner, a minor, a homemaker, or an elderly plaintiff. Yet with these individuals, there are generally accepted methods for estimating lost income.

Simply determining historical wages may not be sufficient, however, since lost income is generally based on an individual?s earning capacity as opposed to projections of actual earnings. Additionally, not all wages earned in the current period are paid in the current period; some wages are deferred. Wage deferral programs include Social Security, qualified pensions and savings plans, stock options and non-qualified deferral plans (409A plans).

Plaintiffs have a duty to mitigate their income losses by returning to the workforce. If the plaintiff remains unemployed (or underemployed), did he or she really try hard enough to find replacement income? For partially disabled plaintiffs, what is a reasonable post-injury earnings expectation, recognizing physical limitations?

Fringe Benefits and Perks

Fringe benefits are various non-wage compensations provided to employees in addition to their regular wage or salary. Fringe benefits can include group insurance (medical, dental, disability and life), retirement benefits, dependent care, paid time off, tuition reimbursement, and so on, and can often exceed 25% of base pay. Senior level employees may also enjoy perquisites such as take-home vehicles, golf club memberships, interest free loans and use of corporate aircraft.

Financial experts often use average fringe benefit cost rates in determining economic loss, but sometimes the impact of an event on a particular fringe benefit is so dramatic that the expert must directly price the loss. For example, an injured plaintiff may lose group life and disability coverage and become uninsurable, representing a significant loss in future financial security for the family. Alternatively, a wrongfully discharged employee may lose much of the value of his or her expected defined benefit by failing to meet the service requirements for lucrative early retirement benefits. In these instances, the expert must employ actuarial methods to determine the economic loss accurately.

Adjustment for Personal Consumption and Personal Maintenance

In wrongful death cases, the plaintiff might be the family or the estate, but not the decedent. Family members would never have received 100% of the decedent?s income, since the decedent?s income would first go toward meeting food, clothing, and other personal expenses. Such expenses are referred to as maintenance expenses. Individuals spend additional money on themselves in the form of vacations or other items above and beyond basic living expenses; these incremental expenses, combined with basic living expenses, are called consumption expenses.

Household Services and Other Non-paid Activities.

In wrongful death, the family experiences a complete loss of household services provided by the decedent. In personal injury, there can be anywhere from a partial to a complete loss.

Medical Costs / Life Care Plans / Burial Costs

In Personal Injury cases, there are significant medical services that have already been received prior to trial, and oftentimes more to be expected in the future. As with other loss components, medical costs can be summarized into pre-trial and post-trial values.

Tax Adjustments

Taxes can impact the loss calculation at several points: (a) when determining the lost income stream, (b) when considering the investment earnings on the lump sum award, (c) when determining whether a tax gross-up is needed on the award itself, and (d) when determining whether an additional tax gross-up is needed for attorney?s fees.

In practice, tax considerations vary by jurisdiction: generally, state court cases do not consider taxes, but there are exceptions. U.S. District Court cases are fairly consistent in that for Personal Injury and Wrongful Death actions, loss of earnings is measured on a net of tax basis. Damage awards for Wrongful Terminations (WT) require a tax gross-up, since WT awards are not excluded from taxable income to the plaintiff.

Finally, the award may need an additional gross-up to account for the taxation on the attorney?s fees, if fees are included as part of the judgment or settlement. Tax adjustments are necessary to avoid the plaintiff?s misfortune of winning the case but losing money.

Putting It All Together

Losses Prior to Trial

Losses prior to the trial are calculated and summarized separately from losses expected to occur after the trial. Usually the pre-trial losses are known with a greater degree of certainty although there remains plenty of room for debate, particularly in the area of loss mitigation. There may be statutorily defined parameters to apply to pre-trial damages, depending on jurisdiction.

Future Losses and the Role of Assumptions

There are numerous assumptions included in the financial expert?s calculations that help to define both the amount of the loss and the likelihood of the loss. Like many states, Tennessee provides few specific details on assumption selection or valuation methodology, instead relying on broad principles.

The future loss calculation takes the components identified earlier and extrapolates for the expected period of loss. This has two important implications:

Summary

Helming experts perform myriad calculations in determining the value of a plaintiff's economic loss. Triers of fact consider these calculations in awarding economic damages for personal injury, wrongful death, and wrongful termination cases. The loss valuation processes may seem arcane, and the economic opinions of two different experts may appear hopelessly divergent. However, the loss estimates are ultimately developed in a logical fashion, best understood by considering the various loss components and systematically reviewing the core valuation processes, which include methods, data and assumptions.

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