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Calculating Economic Damages Can Be Tricky

Abstract:   In wrongful death cases, economic damages generally are equal to the current value of the expected future earnings of a decedent but for the defendant’s wrongful act. But as this article argues, estimating such damages is easier said than done. Valuators must extrapolate earnings over the decedent’s work-life expectancy, account for the value of employee benefits and consider special circumstances.

Wrongful death litigation

Calculating economic damages can be tricky

In wrongful death cases, economic damages generally are equal to the current value of the expected future earnings of a decedent but for the defendant’s wrongful act. However, estimating such damages is easier said than done.

Even relatively straightforward cases require experts to extrapolate earnings over the decedent’s work-life expectancy and account for the value of employee benefits. Special circumstances — for example, when the decedent is a child or stay-at-home parent — can make estimating economic damages particularly tricky.

Historical earnings matter

Typically, valuation experts begin their calculation of economic damages by analyzing the decedent’s earnings history and extending those earnings out over the individual’s work-life expectancy. If an earnings history isn’t available, experts may consult studies that show average earnings for various occupations prepared by government agencies or private sources. Other factors may affect a specific decedent’s future earnings, such as age, education, experience, health history and inflation.

Some jurisdictions allow plaintiffs to recover damages for lost earning capacity. This may be appropriate if there’s evidence that the decedent was qualified or would have become qualified for a higher-paying job in the future.

Employee benefits must be considered

In addition to “base earnings,” experts consider the value of employer-provided benefits, such as retirement and health insurance. In estimating these benefits, qualified experts are careful to avoid “double-counting.” For example, a decedent’s anticipated contributions to a 401(k) or other defined contribution plan are already included in his or her wages. If the employer also contributes to the plan, however, those contributions must be counted.

For pension plans and other defined benefit plans, experts typically project the decedent’s anticipated post-retirement benefit stream, based on expected years of service, salary levels, retirement date and life expectancy.

Special care is required in dealing with paid vacations and sick leave. These types of compensation often are part of an employee’s gross wages, so including them in damages may constitute double-counting.

When decedents and their families were covered by employer-provided health insurance policies, experts determine whether the decedent was responsible for some of the cost of coverage. The employer’s contribution generally represents the economic loss, although a plaintiff may argue that the need to obtain a private policy to cover the decedent’s spouse and family will increase the cost of health insurance over the cost under the group plan.

The loss of Social Security benefits may also affect damages estimates. Determining the amount of the loss can be complicated because benefit payouts depend on such factors as the decedent’s age, marital status and work status, and whether he or she has dependents.

Special circumstances

When the decedent is a minor, arriving at economic damages is particularly tough. To determine future earnings, experts take into account the minor’s age and estimate the level of education he or she would have attained but for the incident causing the death. Typically, this determination is based on statistics showing probable levels of educational attainment by sex, race, geography, family income and educational background.

Stay-at-home spouses present another challenge. The value of household services, including child care, cooking, cleaning, shopping, yard work, repairs and maintenance, and managing finances and investments can be hard to quantify because most stay-at-home spouses don’t track their time. Experts often consult studies that provide average market values for such work.

Even in cases where the decedent participates in the workforce and has a solid earnings history, another factor can throw a wrench in the works: Some courts will offset lost earnings awards by the decedent’s anticipated personal consumption. When experts anticipate this will be the case, they usually consult studies by the U.S. Bureau of Labor Statistics that identify average percentages and dollar amounts of household income consumed by individual family members. Then, they adjust these figures to reflect special circumstances or unusual consumption patterns of the decedent.

Critical to the outcome

As you can see, estimating economic damages in wrongful death cases demands an experienced, resourceful and detail-oriented financial expert. Hiring such an individual is critical to the outcome of your client’s case.

Accounting Firm | New Jersey CPA - DiGabriele, McNulty, Campanella & Co is a New Jersey CPA Firm focused on providing forensic accounting, forensic investigation and damage calculations for litigation and other purposes. Also offer traditional tax, accounting and audit services to companies across the Tri-state region.

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