Forensic Economics - Damage Analysis for Plaintiffs & Defendants
Definition of Economic Damages per the Tennessee Code Annotated. 29-39-101
(1) "Economic damages" means damages, to the extent they are provided by applicable law, for: objectively verifiable pecuniary damages arising from medical expenses and medical care, rehabilitation services, mental health treatment, custodial care, loss of earnings and earning capacity, loss of income, burial costs, loss of use of property, repair or replacement of property, obtaining substitute domestic services, loss of employment, loss of business or employment opportunities, and other objectively verifiable monetary losses;
What is Forensic Economics?
Forensic economics is the scientific discipline that applies economic theories and methods to matters within a legal framework. Forensic economics covers, but is not limited to:
- the calculation of pecuniary damages in personal and commercial litigation;
- the analysis of liability, such as the statistical analysis of discrimination, the analysis of market power in antitrust disputes, and fraud detection; and,
- other matters subject to legal review, such as public policy analysis, and business, property, and asset valuation. (1)
The estimation of economic damages in the context of a Personal Injury, Wrongful Death or a Wrongful Termination action is intended to measure the income producing capacity of an individual and the costs associated with maintaining the individual. In the context of Business Lost Profits action, the estimation of economic damages is intended to act as a remedy to allow a business to recover when a legal wrong or “bad act” has caused it to lose profits.
1) Statement of Ethical Principles and Principles of Professional Practice National Association of Forensic Economics (NAFE) (Effective January 4, 2020)
How are PI and WD Analyses Performed?
Forensic Economics - Calculating Damages in a Personal Injury (“PI”) or Wrongful Death (“WD”) Case
Disclaimer: The content herein will not apply in all situations or in all jurisdictions. Different facts often require different techniques and/or statistics.
What are Economic Damages in this context? In essence, the damages are the replacement value of a life.
- Loss of Earning Capacity that would/could have been earned as occupational compensation over a Worklife Expectancy, less mitigating earnings still able to produce, if any, less Personal Consumption or Maintenance deducted in WD cases.
- Loss of Fringe Benefits that are part of the occupational earning capacity.
- Lost Production of Household Services that would have been performed, less services still able to perform over Life Expectancy.
- Medical & Rehabilitation Bills incurred in the past plus estimates of future bills from a Life Care Plan.
- Discount all Losses to Present Value, usually to the Trial Date.
The Basic “Formula”:
+ Loss of Earning Capacity over Worklife Expectancy
- Mitigating Earnings
- Personal Consumption or Maintenance
= Net Earnings Loss
+ Loss of Fringe Benefits
+ Lost Production of Household Services over Life Expectancy
+ Future Medical Expenses
= Total Loss (i.e., Total Damages) @ Present Value
1.a. Earning Capacity - The amount the subject would/could have earned over a worklife expectancy “but for” the injury or death.
- Sources of an earnings base could be the actual earnings history from W-2s, tax returns, paystubs, depositions or vocational expert.
- The key is the Earnings Capacity, not necessarily what the subject actually earned in the event they are unemployed, information is simply not available, the future expectation is different, the subject is a minor, etc.
- For a minor with no work history, we often look to the parents’ or a guardian’s earnings, education and socio-economic status so as to project a particular educational attainment or work category to the minor and obtain statistical earnings from a source such as the Bureau of Labor Statistics.
- Deduct mitigating earnings in PI cases.
- Deduct Personal Consumption or Maintenance in a WD Case.
1.b. Worklife Expectancy – The number of years that the subject could have worked “but for” the injury or death.
- The more education, the more worklife expectancy.
- Generally, use the statistical studies such as "The Markov Process Model of Labor Force Activity: Extended Tables of Central Tendency, Shape, Percentile Points, and Bootstrap Standard Errors", Gary Skoog, James Ciecka & Kurt Krueger, Journal of Forensic Economics, 22(2) 2011, pp. 165-229.
1.c Personal Consumption or Maintenance in a WD Case
- Personal Consumption-Purchases made by an individual family member who uses family income to make these purchases exclusively for his or her own benefit. For example, food, clothes, toiletries, movie tickets, haircuts, jewelry, medical expenses, and similar items are for the benefit of one family member. Should that person die, the expenses will not continue to be paid by the family.
- Actual spending of an individual may be the best indication of amounts the individual would have incurred in the future; however, the records reflecting the actual spending are often not available, thus statistical sources are needed.
- A Consumption source: "Patton-Nelson Personal Consumption Tables 2011-12", Michael R. Ruble, Robert T. Patton and David M. Nelson, Journal of Legal Economics 21(1), 2014, pp. 41-55.
- Personal Maintenance- Purchases made by an individual family member to keep you alive and well in order to perform the duties of the occupation.
- In Tennessee, we generally follow – Wallace v. Couch 642 S.W.2d 141 (TN 1982) the Supreme Court of Tennessee used the following procedure to estimate damages:
- In estimating damages, the deduction of the decedent’s probable personal living expenses, had he lived, should extend to those personal expenses which, under the standard of living followed by him, would have been reasonably necessary for him to incur in order to keep himself in such a condition of health and well-being that he could maintain his capacity to enjoy life’s activities, including the capacity to earn money.
- A Maintenance source: BLS Table 3403. Consumer units of one person by income before taxes: Average annual expenditures and characteristics, Consumer Expenditure Survey.
2. Fringe Benefits - Additional compensation provided to employees above and beyond an agreed-upon wage or salary.
- Paid Leave / Vacations.
- Supplemental Pay / Overtime.
- Life, Health and Disability Insurance.
- Retirement Plans such as Defined Benefit Plans (pension) & Defined Contribution Plans (401k).
- Legally Required benefits (FICA, workers’ comp & unemployment insurance).
- Other unconventional benefits (uniforms, meals, company vehicle).
- Usually expressed as a percentage of the loss of earning capacity.
- A source: Bureau of Labor Statistics Economic News Release, "Employer Costs for Employee Compensation".
3. Lost Production of Household Services - Those uncompensated activities that maintain and enhance the lives of those in the household that can no longer be performed due to permanent injury or death of the subject.
- The loss, even though not directly compensated like regular employment, has value to the family nonetheless since the tasks will:
- Not be done at all or not as often.
- Be done by someone else in the household (at the expense of other activities the "someone else" might have been doing).
- Require outside assistance that may have to be compensated at market rates.
- The damage is calculated over the entire remaining life expectancy (not worklife expectancy) of the subject.
- A source: Expectancy Data, The Dollar Value of a Day: 2016 Dollar Valuation. Shawnee Mission, Kansas, 2017.
4. Medical & Rehabilitation Bills - Costs incurred in the past plus estimates of future costs of medical services, commodities or procedures from a Life Care Plan as opined by an appropriate expert.
- A medical CPI can be added, then all discounted to present value and added to the other economic damages.
5. Discounting to Present Value - Economic losses are calculated to the Present Value to quantify a steady stream of lost past and lost future income into a single, lump-sum figure for settlement or award purposes.
- The Present Value of the economic losses is “The Replacement Value of a Life”.
- Discount Rate - Investment rate for the present value lump sum award with little to no risk as adopted in Jones and Laughlin Steel Corporation v. Howard E. Pfeifer (462 U.S. 523; 1983; US Sup Crt).
- Nominal Approach includes inflation.
- Net Approach excludes inflation.
- Total Offset-Inflation offsets discounting for a zero rate.
- A Source: U.S. Federal Reserve Statistical release.
Economic Damage Analyses are performed for many reasons, but usually involve the filing of a lawsuit, for these reasons:
- Business transactions gone wrong
- Family disputes over the division of inheritances
- Loss of customers due to unfair competition, libel, or slander
- Medical Malpractice or Accidents causing permanent Personal Injury or a Wrongful Death
- Patent, Copyright, or Trademark infringements
- Wrongful Termination for age, sex, race
In a Personal Injury or Wrongful Death action, the Forensic Economist can:
- Identify all economic losses
- Determine past and future income losses
- Determine the value of fringe benefits
- Adjust the loss for personal consumption or support factors
- Measure the replacement value of uncompensated household services for income earners and homemakers
- Convert the Life Care Plans of medical and rehabilitation experts into present values
- Select the proper discount rate and convert all future losses to their present values
- Prepare a report detailing the value of all losses
- Prepare a rebuttal report of your opponent's expert
- Write questions for direct examination and depositions for himself and cross examination and deposition questions for the opposing expert
- Help you prepare a structured settlement or determine the value of an offered structure
- Present a complex topic in understandable language for a trier of fact